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93–550 2004

IRS EFFORTS TO MODERNIZE ITS COMPUTER 

SYSTEMS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED EIGHTH CONGRESS 

SECOND SESSION 

FEBRUARY 12, 2004 

Serial No. 108–34 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

PHILIP M. CRANE, Illinois 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

AMO HOUGHTON, New York 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

JENNIFER DUNN, Washington 

MAC COLLINS, Georgia 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

SCOTT MCINNIS, Colorado 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

ROBERT T. MATSUI, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

GERALD D. KLECZKA, Wisconsin 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MAX SANDLIN, Texas 

STEPHANIE TUBBS JONES, Ohio 

Allison H. Giles, Chief of Staff 

Janice Mays, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

AMO HOUGHTON, New York, Chairman 

ROB PORTMAN, Ohio 

JERRY WELLER, Illinois 

SCOTT MCINNIS, Colorado 

MARK FOLEY, Florida 

SAM JOHNSON, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

EARL POMEROY, North Dakota 

GERALD D. KLECZKA, Wisconsin 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

MAX SANDLIN, Texas 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii 

C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 2 

WITNESSES 

Internal Revenue Service, Hon. Mark W. Everson, Commissioner ..................... 9 

Internal Revenue Service Oversight Board, Hon. Larry Levitan, Member ........ 31 

U.S. General Accounting Office, Robert F. Dacey, Director, Information Security Issues ............................................................................................................. 42 

Computer Sciences Corporation, Paul Cofoni ........................................................ 51 

Software Engineering Institute, Carnegie Mellon University, M. Steven 

Palmquist .............................................................................................................. 37 

(1) 

IRS EFFORTS TO MODERNIZE ITS COMPUTER 

SYSTEMS 

THURSDAY, FEBRUARY 12, 2004 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:08 a.m., in room 

1100, Longworth House Office Building, Hon. Amo Houghton 

(Chairman of the Subcommittee) presiding. 

[The advisory, the postponing advisory, and the rescheduling advisory announcing the hearing follow:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

October 28, 2003 

OV–6 

Houghton Announces Hearing on 

IRS Efforts to Modernize its Computer Systems 

Congressman Amo Houghton (R–NY), Chairman, Subcommittee on Oversight of 

the Committee on Ways and Means, today announced that the Subcommittee will 

hold a hearing to evaluate the Internal Revenue Service (IRS) efforts to modernize 

its computer systems and hear the outcome of recent independent reviews of the 

IRS Business Systems Modernization (BSM) program requested by IRS Commissioner Mark Everson. The hearing will take place on Tuesday, November 4, 

2003, in the main Committee hearing room, 1100 Longworth House Office 

Building, beginning at 3:00 p.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include the Honorable 

Mark Everson, Commissioner of the Internal Revenue Service (IRS), a representative of Computer Sciences Corporation, and Larry Levitan, Member, IRS Oversight 

Board. 

BACKGROUND: 

United States taxpayers pay more than $2 trillion in taxes each year to the IRS. 

The IRS’s receipt of tax revenue is dependent on a set of computer systems that 

has evolved over the past 35 years. Nearly all IRS employees depend on these computer systems to do their daily jobs, including more than 70,000 who use these systems to deliver direct service to taxpayers. The IRS network of computer systems 

is comprised of over 100,000 individual computers, 2,779 vendor supplied software 

products, and more than 50 million lines of IRS-maintained computer code. 

The existing IRS computer systems architecture became operational in 1967. Although significantly upgraded since then, the basic architecture and processing systems date from the 1960s. Since the 1970s, the IRS has made numerous attempts 

at technological modernization. Success of past efforts was limited, due in part to 

the IRS’s lack of a coordinated, unified plan and approach for fitting all aspects of 

modernization together. 

The current computer systems used by the IRS inhibit its ability to effectively 

carry out the mission of administering the Nation’s tax laws. Maintaining these systems is a major undertaking and gets more difficult every year as older systems replacement parts and programmers are harder by which to come. Here are a few examples of problems caused by the outdated systems: 

• American taxpayers expect a level of service from the IRS that rivals the private sector, but IRS systems do not provide the necessary functionality. 

• IRS employees must work with taxpayer data that is not timely, resulting in 

frustration for both taxpayers and employees. 

• IRS has trouble accounting for funds and maintaining the security of critical 

data and systems. 

Addressing these crucial needs, managing the inherent risks of modernization, 

and delivering the level of service taxpayers expect are all goals of the IRS’s BSM. 

3 

Prior efforts to modernize the IRS’s computer systems in the mid-1990s were not 

successful. These failures prompted the IRS to enter into an innovative contract 

with Computer Sciences Corporation (CSC) in 1998 to launch the BSM program. 

Under the contract, CSC assists the IRS to design new systems and helps to identify 

contractors to perform software development and other tasks. The CSC is referred 

to as the prime contractor, under the principal BSM contract. 

Since mid-1999, more than $1.3 billion has been appropriated for BSM, including $391 million for FY 2002 and $366 million for FY 2003. The House and Senate have 

now approved an additional $429 million for FY 2004. The total cost of BSM is expected to be in the range of $8 billion. 

Soon after his appointment, Commissioner Everson requested an independent review of a critical component of the BSM program to be conducted by Software Engineering Institute (SEI) of Carnegie Mellon University. The study focuses on the history of the Customer Account Data Engine (CADE) project and the feasibility of future plans with respect to CADE. The SEI has completed its interim review, and 

a witness from SEI will appear before the Subcommittee to present its findings and 

answer questions. The CSC has also commissioned Bain and Company to study 

CADE and other aspects of BSM and they will appear and be prepared to discuss 

Bain’s findings. Finally, the IRS has conducted an internal review of the root causes 

of schedule delays and cost increases in BSM projects. The Commissioner is expected to discuss the results of all of the aforementioned studies and to announce 

changes that he plans to implement. 

In announcing the hearing, Chairman Houghton said, ‘‘The IRS must bring its 

systems into the 21st century to provide the high and efficient level of service that 

our taxpayers expect. We saw this back at our 1998 hearing, and it’s critical for us 

to see that this program is on track.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the IRS efforts to modernize its computer systems and 

on independent reviews ordered by IRS Commissioner Mark Everson to assess the 

IRS’s BSM program. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business Tuesday, November 18, 2003. 

Those filing written statements who wish to have their statements distributed to 

the press and interested public at the hearing should deliver their 200 copies to the 

Subcommittee on Oversight in room 1136 Longworth House Office Building, in an 

open and searchable package 48 hours before the hearing. The U.S. Capitol Police 

will refuse sealed-packaged deliveries to all House Office Buildings. 

FORMATTING REQUIREMENTS: 

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee. 

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to 202/225–2610, in WordPerfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

4 

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

* * * NOTICE—HEARING POSTPONEMENT * * * 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

October 30, 2003 

OV–6–Revised 

Postponement of Subcommittee Hearing on 

IRS Efforts to Modernize its Computer Systems 

Congressman Amo Houghton (R–NY), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee hearing on IRS efforts to modernize its computer systems, previously 

scheduled for Wednesday, November 4, 2003, at 3:00 p.m., in the main Committee 

hearing room, 1100 Longworth House Office Building, has been postponed and 

will be rescheduled at a later date. 

f 

5 

* * * NOTICE—HEARING RESCHEDULED * * * 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

January 26, 2004 

OV–10 

Houghton Announces Hearing on 

IRS Efforts to Modernize its Computer Systems 

Congressman Amo Houghton (R–NY), Chairman, Subcommittee on Oversight of 

the Committee on Ways and Means, today announced that the Subcommittee will 

hold a hearing to evaluate the Internal Revenue Service (IRS) efforts to modernize 

its computer systems and hear the outcome of recent independent reviews of the 

IRS Business Systems Modernization (BSM) program requested by IRS Commissioner Mark Everson. The hearing will take place on Thursday, February 12, 

2004, in the main Committee hearing room, 1100 Longworth House Office 

Building, beginning at 9:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include the Honorable 

Mark Everson, Commissioner of the IRS, a representative of the Computer Sciences 

Corporation (CSC), and Larry Levitan, Member, IRS Oversight Board. 

BACKGROUND: 

United States taxpayers pay more than $2 trillion in taxes each year to the IRS. 

The IRS’s receipt of tax revenue is dependent on a set of computer systems that 

has evolved over the past 35 years. Nearly all IRS employees depend on these computer systems to do their daily jobs, including more than 70,000 who use these systems to deliver direct service to taxpayers. The IRS network of computer systems 

is comprised of over 100,000 individual computers, 2,779 vendor supplied software 

products, and more than 50 million lines of IRS-maintained computer code. 

The existing IRS computer systems architecture became operational in 1967. Although significantly upgraded since then, the basic architecture and processing systems date from the 1960s. Since the 1970s, the IRS has made numerous attempts 

at technological modernization. Success of past efforts was limited, due in part to 

the IRS’s lack of a coordinated, unified plan and approach for fitting all aspects of 

modernization together. 

The current computer systems used by the IRS inhibit its ability to effectively 

carry out the mission of administering the Nation’s tax laws. Maintaining these systems is a major undertaking and gets more difficult every year as older systems replacement parts and programmers are harder by which to come. Here are a few examples of problems caused by the outdated systems: 

• American taxpayers expect a level of service from the IRS that rivals the private sector, but IRS systems do not provide the necessary functionality. 

• IRS employees must work with taxpayer data that is not timely, resulting in 

frustration for both taxpayers and employees. 

• IRS has trouble accounting for funds and maintaining the security of critical 

data and systems. 

Addressing these crucial needs, managing the inherent risks of modernization, 

and delivering the level of service taxpayers expect are all goals of the IRS’s BSM. 

6 

Prior efforts to modernize the IRS’s computer systems in the mid-1990s were not 

successful. These failures prompted the IRS to enter into an innovative contract 

with CSC in 1998 to launch the BSM program. Under the contract, CSC assists the 

IRS to design new systems and helps to identify contractors to perform software development and other tasks. The CSC is referred to as the prime contractor, under 

the principal BSM contract. 

Since mid-1999, more than $1.3 billion has been appropriated for BSM, including $391 million for FY 2002 and $366 million for FY 2003. The House and Senate have 

now approved an additional $390 million for FY 2004. The total cost of BSM is expected to be in the range of $8 billion. 

Soon after his appointment, Commissioner Everson requested an independent review of a critical component of the BSM program to be conducted by Software Engineering Institute (SEI) of Carnegie Mellon University. The study focuses on the history of the Customer Account Data Engine (CADE) project and the feasibility of future plans with respect to CADE. The SEI has completed its interim review, and 

a witness from SEI will appear before the Subcommittee to present its findings and 

answer questions. The CSC has also commissioned Bain and Company to study 

CADE and other aspects of BSM and they will appear and be prepared to discuss 

Bain’s findings. Finally, the IRS has conducted an internal review of the root causes 

of schedule delays and cost increases in BSM projects. The Commissioner is expected to discuss the results of all of the aforementioned studies and to announce 

changes that he plans to implement. 

In announcing the hearing, Chairman Houghton said, ‘‘The IRS must bring its 

systems into the 21st century to provide the high and efficient level of service that 

our taxpayers expect. We saw this back at our 1998 hearing, and it’s critical for us 

to see that this program is on track.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on the IRS efforts to modernize its computer systems and 

on independent reviews ordered by IRS Commissioner Mark Everson to assess the 

IRS’s BSM program. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Due to the change in House mail policy, any person or organization 

wishing to submit a written statement for the printed record of the hearing should 

send it electronically to hearingclerks.waysandmeans@mail.house.gov, along with a 

fax copy to (202) 225–2610, by the close of business Thursday, February 26, 2004. 

Those filing written statements who wish to have their statements distributed to 

the press and interested public at the hearing should deliver their 200 copies to the 

Subcommittee on Oversight in room 1136 Longworth House Office Building, in an 

open and searchable package 48 hours before the hearing. The U.S. Capitol Police 

will refuse sealed-packaged deliveries to all House Office Buildings. 

FORMATTING REQUIREMENTS: 

Each statement presented for printing to the Committee by a witness, any written statement 

or exhibit submitted for the printed record or any written comments in response to a request 

for written comments must conform to the guidelines listed below. Any statement or exhibit not 

in compliance with these guidelines will not be printed, but will be maintained in the Committee 

files for review and use by the Committee. 

1. Due to the change in House mail policy, all statements and any accompanying exhibits for 

printing must be submitted electronically to hearingclerks.waysandmeans@mail.house.gov, along 

with a fax copy to 202/225–2610, in WordPerfect or MS Word format and MUST NOT exceed 

a total of 10 pages including attachments. Witnesses are advised that the Committee will rely 

on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

7 

3. Any statements must include a list of all clients, persons, or organizations on whose behalf 

the witness appears. A supplemental sheet must accompany each statement listing the name, 

company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman HOUGHTON. Good morning everybody. The hearing 

will come to order. 

The purpose of today’s hearing is to examine the Internal Revenue Service’s (IRS’s) Business Systems Modernization (BSM) program. Five years ago, in late 1998, the IRS entered into an innovative contract with Computer Sciences Corporation (CSC) and a 

number of other companies to modernize the IRS’s computer systems that had been designed back in the 1960s. This new program 

set out to avoid the pitfalls of an earlier failed effort, and it has 

produced results. 

Taxpayers for the first time last year were able to check the status of their refunds on the Internet, and small businesses could 

apply for an IRS identification number online. 

It is a huge program, and some of the key elements have experienced significant delays and cost overruns. These additional costs 

amount to $290 million, a sizeable percentage of the $1.7 billion appropriated for computer modernization through fiscal year 2004. 

Recognizing the problem, Commissioner Everson acted quickly to 

identify the source of these delays by commissioning several independent studies and digging into the details. Today, we are going 

to hear from the author of one of these studies, Steve Palmquist 

of Carnegie Mellon University, and from the U.S. General Accounting Office (GAO). In addition, we are going to hear from Larry 

Levitan, the Chairman of the IRS Oversight Board Committee that 

produced the review of the IRS computer system modernization. Finally, we are going to hear from the lead contractor, CSC, through 

the testimony of Paul Cofoni. 

Thank you for all being here, and I look forward to your testimony. Before I turn to my associate here, Mr. Pomeroy, I would 

just like to give a word of thanks to the extraordinary service of 

a former staff director of this Subcommittee, Mac McKinney. Mac 

is going to be leaving my office at the end of this month and has 

provided extraordinary service to us all during his 24 years on the 

Hill, 6 years with the Committee on Ways and Means, and 3 years 

as my chief of staff. Mac, where are you? 

[Laughter.] 

Congratulations and thank you so much. Now I would like to 

turn to Mr. Pomeroy. 

[The opening statement of Chairman Houghton follows:] 

8 

Opening Statement of the Honorable Amo Houghton, Chairman, and a 

Representative in Congress from the State of New York 

Good morning. The purpose of today’s hearing is to thoroughly examine the Internal Revenue Service’s Business Systems Modernization. Five years ago, in late 1998, 

the IRS entered into an innovative contract with Computer Sciences Corporation 

and a number of other companies to modernize the IRS’s computer systems that 

were designed in the 1960s. 

The current computer modernization program was designed to avoid the pitfalls 

of an earlier failed effort, and has produced results. Taxpayers, for the first time 

last year, were able to check the status of their refunds on the internet, and small 

businesses could apply for an IRS identification number online. 

But, it is troubling that some of the key elements of the modernization program 

have experienced significant delays and cost over-runs. To date, these additional 

costs amount to $290 million, a sizable percentage of the $1.7 billion appropriated 

for computer modernization through Fiscal Year 2004. 

Recognizing the problem, Commissioner Everson has acted quickly to identify the 

source of these delays by commissioning several independent studies. Today we are 

privileged to hear from the author of one of these studies, Steve Palmquist of Carnegie-Mellon University and from the General Accounting Office. In addition, we 

will hear from Larry Levitan, the chairman of the IRS Oversight Board committee 

that produced a very thoughtful review of the IRS computer modernization. Finally, 

we will hear from the lead contractor, Computer Sciences Corporation, through the 

testimony of Paul Cafoni. Thank you all for being here, and I look forward to your 

testimony. 

I am now pleased to yield to our ranking Democrat, Mr. Pomeroy. 

f 

Mr. POMEROY. Thank you, Mr. Chairman. First, let me echo 

your praise of Mac McKinney, who I have just enjoyed knowing, 

working with, and who represents, in my opinion, the finest dimensions of what the professional staff that keep this place running 

really represent. Mac, best wishes to you. 

Commissioner, I appreciate very much your leadership. I think 

that, speaking as Ranking Member of the Subcommittee on Oversight, the efforts you have made to reach out and keep me fully informed with your management initiatives, I have really appreciated, and I have a lot of respect for what you are achieving. We 

have seen, in fact, the role of computer technology giving a level 

of service to taxpayers beyond what they have seen before. I am 

particularly pleased they can now track the status of their refunds 

on the computer. 

At the same time, I think we can all acknowledge that the computerization of the IRS has certainly not necessarily kept up with 

computerization of other vast enterprises, public or private, but I 

would especially say we have been eclipsed by what has occurred 

in the private sector. I think that we all need to learn by what has 

happened. We have invested a lot of money, we have had consultants everywhere, and yet the progress may be not as far along as 

we would have hoped. 

So, I will look forward in the course of this hearing to learn from 

you, Commissioner, as well as some of the contractors about their 

thoughts in terms of how this is coming and how we might do it 

better. I think this is square in the strike zone of where the Subcommittee on Oversight has to pay its attention. We need to understand what the Commissioner’s major initiatives are, how we can 

improve service of the IRS to the taxpayers of this Nation, and we 

need to be prepared to help the Commissioner, as well, with such 

9 

focus and maybe additional funding as may be required. Thank 

you, Mr. Chairman, for this hearing. 

[The opening statement of Mr. Pomeroy follows:] 

Opening Statement of the Honorable Earl Pomeroy, a Representative in 

Congress from the State of North Dakota 

The 2004 tax return filing season is well underway. Nationwide, taxpayers are in 

the process of filling out and filing their federal income tax returns with the Internal Revenue Service (IRS). IRS’s computer systems have improved dramatically in 

recent years. Millions of taxpayers annually now file their tax returns electronically 

through E-File or Free File resulting in more error-free returns and quicker turnarounds for tax refunds. A taxpayer can even track the status of his or her tax refund check on the Internet to learn exactly when it will be mailed or deposited directly into a bank account. 

Taxpayer services provided to millions of Americans each year have been greatly 

improved through upgrades to many of IRS’s automated systems. IRS employees 

now have the tools and information needed to resolve a taxpayer’s problem while 

the person is on the telephone with the IRS. Similarly, the IRS is able to direct tax 

inquiries quickly to employees with special expertise which significantly reduces unnecessary waiting times. 

I remain concerned, however, that the IRS has a long way to go toward modernizing its overall computer systems architecture. With a system of 100,000 individual 

computers, nearly 3,000 vendor-supplied software products, and more than 50 million lines of computer code, it is obvious that the IRS must have a focused, coordinated, and unified plan for the 21st Century. I will be interested in exploring the 

agency’s progress in this regard during today’s hearing. 

I am particularly interested in learning more about the IRS’s apparent inability 

to deliver on the ‘‘big computer projects’’ involving the master file of IRS records and 

system-wide infrastructure systems. I have learned that problems include inadequate performance by contractors, overly ambitious project portfolios designed by 

IRS management, and insufficient direct participation by IRS employees in the 

management of technology programs. 

I look forward to the Subcommittee’s discussion of these issues and thank Chairman Houghton for scheduling today’s important hearing. 

f 

Chairman HOUGHTON. Thanks. Again, thank you, Commissioner, for being here. We are honored by what you are doing and 

helping all of us think through this maze of computerization. We 

look forward to your testimony. 

STATEMENT OF THE HONORABLE MARK W. EVERSON, 

COMMISSIONER, INTERNAL REVENUE SERVICE 

Mr. EVERSON. Thank you, Mr. Chairman, Mr. Pomeroy. I appreciate the opportunity to testify this morning on the status of the 

BSM program at the IRS. I also want to thank the Subcommittee 

for your continuing support of the IRS. 

The BSM is a key part of our broader agenda at the IRS. Before 

offering more details about the modernization program, let me set 

the stage with a few comments on our priorities at the IRS and the 

challenges we face. 

As you know, I have set three priorities for the IRS during my 

5-year term as Commissioner. First, we must continue to improve 

service, making it easier for the taxpayer to understand and comply with the tax laws. Through focused implementation of the IRS 

Restructuring and Reform Act (RRA) of 1998 (P.L. 105–206), the 

IRS has measurably improved service to taxpayers and practitioners. We aren’t backing away from this commitment to service. 

10 

The second area of emphasis is the subject for today, information 

technology. I will talk about that more in a moment. 

The third focus is to strengthen the integrity of the Nation’s tax 

system through enhanced enforcement activities. As you know, the 

President recently transmitted the 2005 budget request to Congress. It calls for a 5-percent overall increase for IRS, including a 

10-percent boost to our enforcement activities. 

We have four enforcement priorities. They are to discourage and 

deter noncompliance, with emphasis on corrosive activity by corporations, high-income individuals, and other contributors to the 

tax gap; assure that attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law; detect 

and deter domestic and offshore-based tax and financial and criminal activity; and discourage and deter noncompliance within tax-exempt and government entities and misuse of such entities by third 

parties for tax avoidance and other unintended purposes. 

The budget request addresses each of these priorities, with which 

you are well familiar from your oversight work, and I am hopeful 

that you will be able to actively support our proposal for this increased funding. 

Now, let me turn to information technology modernization. As 

you have indicated, the IRS has made progress on major technology 

applications that provide enhanced services to taxpayers and practitioners. Examples include improved telephone service, electronic 

filing, and a suite of e-services to tax practitioners, but we have 

failed thus far to deliver big projects on the master files and infrastructure systems, the focus of our discussion today. 

Four studies completed last year consistently identified the following problems in delivering these large efforts: insufficient participation in the technology program by IRS business units, an 

overly ambitious portfolio, and inadequate performance by the contractor. The IRS is responding by increasing business unit ownership of these projects, resizing the project portfolio, reducing the 

modernization program from $388 million in fiscal year 2004 to 

$285 million in the President’s 2005 request before the Congress 

now, and revising our relationships with the contractor and assuring joint accountability. 

It is this last subject that I want to speak to now. I would like 

to read to the Subcommittee a letter which I sent yesterday to 

Mike Laphen, who is the President and Chief Operating Officer of 

CSC. 

‘‘Dear Mike, I want to express my appreciation for your personal 

and active participation in improving CSC’s support of the IRS’s 

modernization effort. I believe that the IRS and CSC have made 

progress since we began our monthly meetings last August in identifying and addressing the challenges that confront us in modernization. The progress we have made makes it all the more disappointing that CSC has indicated that it will be unable to meet 

its revised delivery date of April 2004 for the Integrated Financial 

System (IFS) project.’’ 

‘‘While I appreciate CSC’s candor and your agreement to conduct 

the remaining work on the first release of IFS under a capped price 

arrangement at no additional cost to the IRS, I believe that our 

joint accountability for advancing modernization requires me to 

11 

take action in response to this unsettling development. Accordingly, 

I have decided to direct our upcoming enforcement modernization 

projects for collection contract support and filing and payment compliance to other contracts.’’ 

‘‘As you can understand, I am not taking this step lightly. While 

no doubt unwelcome to CSC, I hope that this decision will lead to 

a sharpened focus and discipline and will, in fact, enhance the 

prospects for successful and timely delivery of other modernization 

projects by CSC. I see this approach as similar to what the IRS has 

done, as reflected in the President’s 2005 budget request, in limiting the modernization portfolio in order to allow us to sharpen 

our focus and move more expeditiously.’’ 

‘‘In addition to the decision indicated above, we will carefully assess CSC’s performance on current projects and the results of 

CSC’s overall program management and integration efforts before 

awarding any follow-on work for existing projects. I look for CSC 

to demonstrate success on existing projects as it has recently on 

the important e-services suite of applications (which is significantly 

enhancing direct services to taxpayers and practitioners), in order 

to participate in new IRS modernization projects. In short, we need 

consistent, high-level performance and service from CSC in order 

for both sides to benefit from our partnership.’’ 

‘‘Again, thank you for your personal attention to these issues and 

CSC’s acceptance of responsibility for this most recent delay. I look 

forward to working together to implement our modernization program successfully. Sincerely, Mark W. Everson.’’ 

This letter accurately summarizes where we stand. I want to assure the Subcommittee that the challenges facing the modernization effort are receiving my full attention. Thank you, and I would 

be pleased to take any questions and say good morning to Mr. 

Portman. 

[The prepared statement of Mr. Everson follows:] 

Statement of the Honorable Mark W. Everson, Commissioner, Internal 

Revenue Service 

Introduction And Summary 

Chairman Houghton, Ranking Member Pomeroy, and distinguished Members of 

the subcommittee, I appreciate the opportunity to testify this afternoon on the status of the Business Systems Modernization (BSM) program of the Internal Revenue 

Service—and to discuss our recent review of the program’s health. I also want to 

thank you for your support in working with the House Appropriations Committee 

to ensure that the IRS receives adequate funding to carry out the program. 

Business Systems Modernization is a key part of our broader agenda at the IRS. 

Before offering more details about the modernization program, let me set the stage 

with a few comments on our priorities at the IRS and the challenges we face. 

At the IRS, our working equation is service plus enforcement equals compliance. 

The better we serve the taxpayer, and the better we enforce the law, the more likely 

the taxpayer will pay the taxes he or she owes. 

To support this philosophy of service plus enforcement equals compliance, we are 

guided by three themes. 

First we are improving service, making it easier for the taxpayer to understand 

and comply with the tax laws. We have divided the IRS into ‘‘customer segments’’— 

including wages and income, small, medium and large businesses, non-profits. In 

the last four years, our toll-free telephone service has risen sharply. Downloads of 

IRS forms from our website has soared. Electronic filing of taxes has jumped from 

29 million in 1999 to 52 million last year and nearly half of all taxpayers are expected to efile this coming year. 

Second, we are boosting enforcement, a key emphasis of the President’s 2005 IRS 

budget request just sent to Congress. 

12 

By our best estimates, we lose a quarter trillion dollars each year because taxpayers do not pay their tax voluntarily or in a timely fashion. (This is a rough estimate based largely upon 1988 data from our old Taxpayer Compliance Measurement 

Program). 

Over the last four years, the number of Americans saying it is OK to cheat on 

taxes rose from 11 to 17 percent. Sixty percent of Americans believe that people are 

more likely to cheat on taxes and take a chance on being audited. 

This drop in compliance coincides with drop in enforcement of the tax law. Since 

1996, the number of IRS revenue agents, officers, and criminal investigators has 

dropped by over 25 percent. 

At the IRS we have begun to address the tax gap crisis. We have shifted badly 

needed resources so we can hire more front-line enforcement personnel—who will 

primarily focus on non-compliance among high income individuals and businesses. 

In addition, I am most pleased and grateful that the President’s FY 2005 budget submission requests an additional $300 million for enforcement activities over the 

FY 2004 consolidated appropriations level. What will this extra $300 million do? 

It will help to: 

• Discourage cheating and non-compliance, particularly by corporations, high income individuals and tax exempt groups. • It will help attorneys, accountants and other tax professionals adhere to professional standards and obey the law. 

• It will detect and deter domestic and off-shore tax and financial criminal activity. 

• Discourage and deter non-compliance within tax-exempt and government entities and misuse of such entities by third parties for tax avoidance and other 

purposes. 

Our third focus is modernization of our information technology, often referred to 

as Business Systems Modernization or BSM. Most of our tax administration systems 

are very old and difficult to keep current with today’s fast paced environment; they 

must be modernized. 

We are committed to resizing our modernization efforts to allow greater management capacity and to focus on the most critical projects and initiatives. We used 

comprehensive studies over the summer to help us identify opportunities to improve 

management, re-engineer business processes and implement some new systems and 

technology. The FY2005 budget provides $285 million to continue this effort to replace current business systems and technology. 

However, equally important is the critical role technology modernization plays in 

enabling customer service and enforcement goals. To the IRS, ‘‘modernization’’ is 

broader than just those parts funded by BSM. To the taxpayer it is the full suite 

of technology enabled services that we provide, such as irs.gov website and telephone technology. 

‘‘Modernization’’ also includes projects with which taxpayers would not be directly 

involved, such as replacing our master file system, implementing the on-line security features, and building the modernized technological infrastructure on which all 

of our future modernization applications will build and depend. 

To date, after five years, we have achieved mixed results with the modernization 

program. 

Program Challenges 

One aspect of BSM on which there was unanimity is that this program is as complex and challenging as any information technology program in the world. When 

nominated last February, I began learning about the current Modernization program from both IRS executives and others inside and outside the government. I 

learned of earlier unsuccessful attempts to modernize the IRS. But I also learned 

that staff was optimistic they were beginning to control the difficulties encountered 

in the first four years. We expected to achieve some key milestones in the summer 

and fall, such as the initial delivery of the system that would start to replace our 

antiquated tax accounting system, called the Customer Account Data Engine 

(CADE). 

Before the summer was through, it became clear two very significant modernization projects, CADE and the Integrated Financial System (IFS), would experience 

substantial delays. These were two major setbacks. 

These delays were clear evidence that significant problems still existed in the 

BSM program. Based on both external and internal assessments, it became apparent to me that we needed to address four key elements needed in order to turn the 

program around: 

13 

First, the scope of the projects was far too large. After working very closely with 

the Treasury Department and the Office of Management and Budget (OMB), and 

evaluating recommendations we received from the Oversight Board and Congress, 

we narrowed the scope and number of modernization projects. The IRS management 

team and the PRIME contractors had taken on too much and been stretched too 

thin. We did not have the capacity to properly manage such a large portfolio. The 

result is that we have been unable to devote the resources, energy and attention 

to meeting our primary goals. 

I am pleased to report that over the last year, we made progress in this area. We 

considerably reduced the size and scope of the modernization program, and have 

been working with the Department and OMB to seek more opportunities to better 

balance management capacity with the modernization portfolio, without dramatically reducing the program’s effectiveness. 

Second, a much greater degree of business ownership and participation was critical. The modernization program will only be successful if the most senior and experienced IRS business leaders take ownership of the program. 

While we have a great deal of work to do, we have made some progress in this 

area as well. I appointed John Dalrymple, who has spent over 30 years focused on 

front-line taxpayer issues, as the Deputy Commissioner for Operations Support. In 

addition, I appointed the former IRS CFO, Todd Grams, to the CIO position to bring 

better management and financial discipline to the technology modernization program. 

These management appointments represent a change in the way we have pursued 

modernization projects in the past. These appointments are only the beginning of 

bringing more management discipline and increased business involvement to our 

modernization efforts. Success in this area will require a willingness on our part to 

deviate from past practices, including a change in the allocation of accountability 

for modernization projects. We will appoint the appropriate people to these critical 

projects, clearly set expectations, and hold these people accountable for the results. 

Third, we needed significant improvements in the performance of our PRIME contractor. It’s no secret that our projects have consistently run late, delivered less 

functionality than planned, and cost significantly more than targeted. While the 

PRIME has improved its performance, nevertheless, delays and cost increases persist, as evidenced by the recent slippages in CADE and IFS deliveries. We need to 

have a PRIME contractor that consistently meets its commitments. 

Fourth, we needed fresh and independent assessments from outside experts on 

the health of the modernization program, as whole, as well as specific projects, such 

as CADE. 

All of the assessments confirmed that the IRS modernization effort is a massive, 

highly complex, high-risk program that is confronting a number of critical management and technological challenges. These studies also made it clear that we should 

not turn back, but rather make a series of changes to strengthen our current program. While all of these studies assessed different components of the program, they 

clearly suggested consistent improvement opportunities. 

Looking beyond the conclusions drawn for the overall program, the outside assessments concluded we need significant improvements in execution to put our most 

critical projects back on track. 

I do not intend to understate to the Committee the seriousness of the current 

challenges faced by the modernization program or my awareness of the long history 

and inconsistent record of success on modernization. But I do think it is worth noting that we have achieved some significant accomplishments to date. 

Delivering Benefits 

First, we have developed a broad strategic plan called the Enterprise Architecture, encompassing both the functional and technological dimensions of the BSM 

program. We recently won the ‘‘Excellence in Enterprise Architecture Leadership’’ 

award for this Enterprise Architecture from E-Government. 

Second, we established a secure, on-line technical infrastructure to support both 

new BSM applications as well as other future IRS applications. 

Third, we have delivered applications that provide tangible benefits to taxpayers 

and improve the efficiency and effectiveness of our tax administration system. They 

include: 

• Customer Communications, which reduced taxpayer call-waiting time in half, 

reduced the number of abandoned calls by 50%, and doubled the number of refund inquiries from our Spanish speaking taxpayers. 

• Where’s My Refund?/Where’s My Advance Child Tax Credit?, which gives taxpayers instant updates on the status of their tax refunds and advance child tax 

credits. These applications have received over 40 million requests since the beVerDate May 04 2004 07:08 May 21, 2004 Jkt 093604 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HR\OC\A93550.XXX A93550
14 

ginning of the year. By shifting a significant volume of customer demand to the 

Internet, we have seen a measurable improvement in service to taxpayers who 

still choose to call. • e-Services, which includes preparer tax identification number (TIN) applications 

with instant delivery, individual TIN matching for 3rd party payers, on-line registration for electronic e-Services, and on-line initiation of the electronic originator application (currently released to a controlled segment of external users). 

I am pleased to announce that we recently made the first part of e-Services 

available on our public web site. The remaining parts will come out over the 

next several months. • Internet EIN, which allows small businesses to apply for, and receive, an Employer Identification Number on-line. Since its launch last May, we have processed over 453,000 EIN applications that have come in over the Internet. • HR Connect, which allows IRS users to perform many personnel actions on-line. 

To date, we have rolled this out to about 73,000 employees, and will complete 

the rollout by early 2004. This technological advancement will enable the Service to redirect hundreds of positions to enforcement activities by the time it is 

fully deployed, which we have planned for October 2005. 

Now, let me provide a summary of the programmatic reviews, and the current 

program status, beginning with CADE. 

Carnegie Mellon Software Engineering Institute (SEI) Assessment of CADE 

CADE, as most of you already know, is designed to replace the IRS’ current Master Files. The Master Files are the Service’s central and official repository of taxpayer information. As such, it is a singularly important system to the IRS. The Master Files are drastically over age in the life cycle of technology, having been in place 

since the 1960s. They are considered reliable but are extremely inflexible and fragile, and therefore difficult to support, in part because of the old technology they use. 

We initially planned CADE to be available for the 2002 filing season, but we 

missed several dates. Following the acknowledgment in August 2003 that we would 

not meet the latest scheduled release of the first component of the CADE project, 

I requested that the Carnegie Mellon Software Engineering Institute, or SEI, provide an independent assessment of CADE’s history and the feasibility of future 

plans for CADE. 

SEI advised us to stay the course with this first release of CADE, which would 

handle 1040EZ returns for single filers that were either even balance or which had 

a refund due. They felt the architecture for this release was sound. 

However, they strongly urged us to start paying more attention to two areas. One 

was to get started on building a version that would utilize the future technology for 

CADE, which the first release does not. The other was to accelerate plans to better 

understand the scope of future releases to ensure that our approach was sound for 

the long term. 

We have taken steps to address both of these recommendations and we plan to 

have SEI come back periodically to check on our progress. 

Let me briefly update you on where we are with CADE. 

Status Of The CADE Project 

First, we have now passed some critical hurdles with the version of CADE that 

would have gone into production last summer, such as the system integration test, 

a pilot, and a system acceptance test. PRIME will address the defects identified during this process in the release currently under development. 

Second, we are well along on implementing the changes needed to create the 2004 

filing season version of CADE so that we can process actual tax year 2003 returns 

in 2004. PRIME has developed a detailed plan to be able to develop this ‘‘working 

CADE’’ by this summer. While that will clearly be too late to process any significant 

number of tax year 2003 1040EZ returns, it will enable us to launch CADE in a 

low risk setting and gain valuable operational experience. 

Third, we are taking steps to ensure that the future changes needed to deploy 

CADE for the full 2005 filing season will be tested and ready by January 1, 2005. 

Let me also note that the vast majority of the work on the first component of 

CADE is being conducted under a type of contract which limits the IRS’s PRIME 

cost to their original proposed costs for the first release. Additional costs are, however, being incurred for filing seasons changes that we now need to apply due to 

the delay. 

Other Modernization Assessments 

In addition to the assessment of CADE undertaken by SEI, we commissioned two 

other outside, independent assessments of various aspects of Modernization. These 

15 

studies include the PRIME Review assessment, conducted by Bain and Company, 

and Assessment of the IRS Office of Procurement, conducted by Acquisition Solutions, Inc. The purpose of the PRIME Review was to identify causes of breakdowns 

in business processes and the engagement model and to provide recommended solutions. This assessment included identification of specific skill and leadership gaps, 

an audit of CADE, and finalization of the requirements definition and validation of 

the Integrated Master Schedule. 

While the primary purpose of the Assessment of the IRS Office of Procurement was 

to determine the efficiency and effectiveness of the IRS’ Procurement organization, 

it did provide a brief assessment of the Modernization contracting program. 

IRS Responses to Internal and External Assessments 

First let me say that we have accepted the recommendations made by these external reviewers and are moving aggressively to implement them. 

I have significantly enhanced the top-level leadership of the modernization effort. 

I personally meet with the IRS top team every other week to discuss the status of 

critical project goals and other program improvement initiatives. 

I have also expanded my personal interactions with the PRIME Contractor, Computer Sciences Corporation (CSC), by increasing my personal engagement with their 

top-level executives. I meet monthly with the President/COO of CSC to provide clear 

direction on performance expectations and accountability. 

In addition to strengthening the top team, I have asked John Duder, the Deputy 

Commissioner for the Wage and Investment Division, to transfer to the modernization program and focus his complete attention to delivering the CADE project. I 

have also asked Rich Morgante, the Deputy Commissioner for the Tax Exempt and 

Government Entities Division, to join the modernization program to lead the implementation of the recommendations made by the external reviews. 

Now that I have discussed the Modernization program’s accomplishments and the 

improvements underway, let me address the status of our most critical projects. 

Status of Other Tax Administration Modernization Projects 

I have discussed CADE at some length because, like the new online infrastructure 

that we have deployed, it is a key foundational component of the modernized systems. I will only briefly discuss the other four systems that we are developing, two 

of which address tax administration and two of which address internal financial 

management. 

The two new tax administration systems are e-Services and Modernized e-file. 

e-Services provides an array of services aimed at larger third party providers, including electronic return originators and institutions that report 1099’s, such as 

banks and brokerage firms. 

The e-Services suite of projects is over a year late and its cost has increased almost 100% over estimates made several years ago. Given that these are the first 

applications to use major components of the new modernized infrastructure, and 

given the complexity of linking to our very old current systems, it is not surprising 

that we did not meet our initial estimates for costs and schedule; however, we must 

adhere more closely to cost and schedule estimates in the future. 

I am very pleased to inform the Subcommittee, therefore, that we now see sunshine at the end of the e-Services tunnel. We have deployed the first parts of a 

multipart release, including online registration, interactive Taxpayer ID Number 

Matching, and online Preparer Tax ID Number application, and made them available on irs.gov for several months. In addition, on January 28, 2004, we fully deployed the electronic return originator application on irs.gov. Over the next couple 

of months, we will deploy additional functions, like electronic account resolution, 

transcript delivery, and online Disclosure Authorization applications. 

Modernized e-file will provide electronic filing for the first time to large corporations and tax exempt organizations. 

The Modernized e-file application achieved a very significant milestone last November when we began software certification testing on schedule for dial-up users. 

This certification is the process by which we validate that vendor software products 

work properly with our systems. On February 4, 2004, we began certification testing 

over the Internet. 

We had hoped to open Modernized e-file for business at the beginning of January, 

but our target date has slipped to mid-February. Later releases of Modernized efile will enable the filing of additional 1120 and 990 schedules. Eventually, this 

project will replace our almost 20-year old 1040 e-file system. 

16 

Status of Internal Management Modernization Projects 

The two internal projects we are developing are the new Integrated Financial System (IFS) and the Custodial Accounting Project (CAP), both of which are disappointments at this time. 

We are working on internal systems to correct and address a number of financial 

material weaknesses that reflect internal management deficiencies, such as compliance with current federal accounting standards and the ability to accurately report 

on tax-related income. While we are very proud to be able to close our books on the 

completed fiscal year by mid-November, and to have received a clean audit opinion 

from GAO the last three years, nevertheless, we are operating with deficient internal management systems that urgently need correction. We have tried to balance 

the work on tax administration systems with the necessary work on internal management projects within the Modernization program, though, as I noted earlier, 

there is no doubt that we have been trying to do too much overall. 

In the case of IFS, we believe that we understand the causes that led us to miss 

the target production date of October. We initially set a target for IFS that was, 

in the end, too aggressive, and we did a very poor job of setting expectations and 

communicating our risk. On January 30th, the CSC executives informed us that 

their revised target of April 2004 was not achievable. The new target date is October. 

This further delay in IFS delivery is a huge disappointment both to the IRS and 

to me personally. While the PRIME has indicated their willingness to bear the financial burden for this further delay, we feel that the IRS needs to take some 

stronger steps. Specifically, we will expand the competition for the new enforcement 

projects that we plan to start later this year and next year. In addition; we will also 

expand the competition for the next phase of IFS. 

CAP is also a complex project. Whereas, for IFS, we are using a standard Commercial-off-the-shelf (COTS) product that we are tailoring to the IRS, CAP is largely 

custom-developed software tied to the 40-year old Master Files system. Over the 

past several months, progress has slowed significantly as the CAP project drives 

through hundreds of millions of records in the Individual Master File. 

After intensive analysis of the factors causing the slowdown of progress on CAP, 

we have taken a number of steps that I believe will get CAP on a more predictable 

track. We now expect to begin loading the CAP data warehouse in May to ready 

it for production in August. In addition, we are currently negotiating an agreement 

to limit the government’s financial risk with the CAP contractor, Northrop Grumman Mission Systems, for the first release of CAP. 

In order to get a jump on the second release of CAP, we started some design work 

last April, but we have now decided to significantly delay that project, both to ensure total focus on the first release and to wait until we are certain that the approach to CAP in the first release is what we want to use in the second release. 

Conclusion 

While we have much work to do on the modernization to meet all of the challenges we currently face, I can assure you that it is one of my top priorities as Commissioner. I also assure you that we have a solid oversight relationship with Treasury, OMB, Congress, and the IRS Oversight Board. We are working closely with 

these stakeholders to ensure they are well informed of program goals and the status 

of the projects against schedule and cost targets. All parties involved in modernization are keenly aware that our first goal is to ensure we spend taxpayers’ dollars 

wisely. 

The reviews that the PRIME and I commissioned, and the actions we are now 

taking, reflect our strong commitment to get Modernization ‘‘right.’’ The long-term 

future of the tax system depends so much upon our success. While the progress to 

date has been decidedly mixed, we need to put in place the foundation upon which 

the tax system will build and rely for decades to come. 

Mr. Chairman, Ranking Member Pomeroy, and distinguished Members of the subcommittee, again let me say that I appreciate your leadership and the continued 

support of the subcommittee, and would be pleased to answer any questions you 

may have. 

f 

Chairman HOUGHTON. Would you like to make an opening 

statement? 

Mr. PORTMAN. No thanks. 

17 

Chairman HOUGHTON. Okay. Obviously, this is a critical issue, 

critical for everybody, not just the mechanics of the IRS, and I 

think it makes a lot of sense having a little competition. Of course, 

the question is how long will it take for enforcement and other 

things to get up to speed because of the total package involved. 

Let me ask you a question. When you have these contracts, Commissioner, do you have anybody from the IRS working inside the 

contractor’s shop as well as having them working inside your shop 

to get a feel of timing, meeting deadlines, because when you take 

a look at the span of years such as we have had with this $1.7 billion contract, with its terrific overrun, about 17 percent overrun, 

how did they get so off track? 

Mr. EVERSON. There are several points you have in there, Mr. 

Chairman, and let me take them in order. I agree with you about 

the point you make about the action we are taking, the steps we 

took yesterday. I have run businesses and had accounts where you 

are servicing 100 percent of the supply to the customer. You work 

as hard as you can to protect that position, but when the day 

comes that it is opened up and there is a second supplier, it 

changes everything. In my experience, it usually makes you a better supplier because you are held to two standards, not just your 

own standard of your relationship with the customer, but you also 

are being compared constantly against your competition. This is not a small step. In the $285 million request that we have pending before the Congress, only $40 million of it pertains 

to the enforcement modules that I mentioned. The CSC will still 

participate in a portion of that because they have the overall integration role, but what we are suggesting is we will look at other 

contracting vehicles. So, your first point is entirely correct. This is 

a significant step. What we tried to craft was a balanced approach. 

I talked yesterday with Mr. Laphen, who has been terrific to 

work with through all of this. He understands. He characterized 

the action that we took as balanced and providing incentives as 

CSC is able to meet commitments and demonstrate improvements 

to gain the future work, without taking an overall too harsh step 

at this time, which would be in nobody’s interest given how far we 

have come. So, that is the first point I would suggest. 

You asked about how this program gets off kilter over a period 

of time and we get to these overruns. I think that I would go back 

to those three conclusions that the four somewhat overlapping 

studies indicated, and you are going to hear from one of the groups 

that helped us on this. 

Again, I don’t think that the IRS had adequate business unit 

oversight or ownership of these projects. They were treated as technical projects driven by the technical staffs and by the contractor. 

That means that our business unit people didn’t help set the standards. They weren’t in there at an early enough stage working on 

the testing, making sure that things were happening. 

As a result, we got a very cumbersome system where just a simple change request took 30 or 40 weeks to get through. This adds 

incredible cost because you are circling back and redoing work, and 

you haven’t anticipated up front what you need to do. 

So, we are looking at all that. We are tightening it up by having 

these projects driven out of the business units. As one example, you 

18 

are all familiar with our structure that came in through RRA 1998. 

We have got this Wage and Investment group that is for the bread 

and butter taxpayer, the 100 million-plus returns that come in each 

year. Our Deputy Commissioner for that whole operation is now in 

charge of the Customer Account Data Engine (CADE) project because they are going to be the users. So, CSC and our technical 

staff work for John Duder, who is the deputy there. That is a big 

change. That will help us. 

Lastly, on the very specific point of co-location, it is something 

that Mike Laphen and I have talked about. As we started to work 

together, one of the observations we had was just what you said, 

that we have got too much independence here. We have talked 

about having a lot more co-location of our staffs and CSC is doing 

that, and we are working with them. Mike and I haven’t agreed to 

have a co-located office, but it may come to that, you never know. 

Chairman HOUGHTON. Thanks very much. I know with your 

ability and your background experience, this will work out well. It 

really, at some point it has to work—— 

Mr. EVERSON. Yes. 

Chairman HOUGHTON. We have had so many approaches here 

that have fallen short, every time, and the whole system is banking 

on your success. 

Mr. EVERSON. It is, but I do want to reassure you. As you have 

indicated, I give the IRS a mixed grade here. A lot has been done. 

I don’t want people to tar the whole effort here. As I meet people 

around the country, they say, boy, some of these things you are 

doing with the technology are just great. It is largely these internal 

systems that we just haven’t been able to crack the nut on yet. 

Chairman HOUGHTON. Thank you very much. Mr. Pomeroy? 

Mr. POMEROY. Thank you, Mr. Chairman. Commissioner, I 

found your testimony very interesting and typical of what our relationship has been, very forthright on your part in identifying problems both with the IRS and with the contractor. I think that it is 

a lesson that is learned every day in terms of the relationship between consultants and the enterprise, public sector, private sector, 

wherever. You have to have very focused relationships and you 

have to have an awful lot of involvement or the thing is going to 

get away from you. It sounds like it got away from us a bit on especially the main computer project, is that your assessment? 

Mr. EVERSON. I think everybody had the best of intentions 

here, absolutely a real desire to be successful. The very scope and 

complexity of these projects doesn’t give you much of a choice. You 

either get into it and understand it, or it is almost too much for 

you. 

Mr. POMEROY. Yes. 

Mr. EVERSON. What I think happened was the people who 

needed to understand these projects, meaning the folks that run 

our operations, were able to take a pass because of the way we 

structured it. 

It would be easy for me to sit here and just trash the contractor. 

I am not doing that. There was a joint failure to deliver in which 

the IRS clearly shares. I don’t think we were correctly configured 

and managing our efforts. So, it did get away from us, as you indicated. 

19 

Mr. POMEROY. I think that as government looks at a greater 

role of outsourcing right across the board, this is something we 

need to keep very much in mind, and you have to have on staff requisite expertise to really know these projects, to be a part of the 

projects, to oversee the projects. If we are going to slash staff internally and outsource and somehow give the taxpayer a better value, 

that isn’t always going to work, especially if you are unable to sufficiently be involved in monitoring the project. 

Mr. EVERSON. I couldn’t agree with you more. When you look 

at business processes, whether they are your own people or they 

are automated or they are external people or goods or services, you 

have to treat them all as if they were in your own shop and work 

very closely together. That is a challenge when you have outside 

services. That needs to be managed correctly. 

Mr. POMEROY. Is there mitigation that the Federal Government 

should initiate relative to nonperformance or violated contracted 

performance by the contractors? 

Mr. EVERSON. No, I don’t think so. I think at this stage, our 

relationships with the contractor are good. I would suggest to you 

that the relationships, in fact, are very strong. It is just—— 

Mr. POMEROY. We get our money back. 

Mr. EVERSON. If you can—I would love it if you could get some 

money back—ask Mr. Cofoni. Maybe he can give you some back. 

He will be talking later, but I think what CSC has done is indicated they are going to cap this IFS release, which is good news 

for us, making sure we won’t incur additional overruns, as the 

Chairman indicated. We are going to be working very closely in 

looking at fixed-price alternatives as we go forward, so—— 

Mr. POMEROY. I am pleased about that. It just would seem to 

me within your kind of fiduciary responsibility as manager, someone either within IRS or the U.S. Department of Justice ought to 

be evaluating whether or not there is a liability issue that ought 

to come back. 

Mr. EVERSON. We monitor the contracts closely and the preponderance of them, up to now, have been a cost-plus basis, so that 

if you mismanage the process, as we were just chatting, the costs 

go up. 

Mr. POMEROY. Okay. The final thing I would mention is I know 

that you and I have spoken about taxpayer compliance and how 

disappointed we have been that some very well established players 

in the marketplace have been repeddling tax shelters that really 

are not grounded very well under law and fail any test of ethics, 

of business ethics. What I am wondering is, as we try to look at 

adding structural disincentives for any enterprise that might consider this kind of conduct, is there cross-linkage relative to contractual relationships with the IRS? Now let me point my question. 

KPMG is a fine, long-established firm, one of the best in the 

world, but they had a renegade arm that somehow was very involved in peddling tax shelters to prospective clients that they had 

gone an awful long way, strayed a long way from the path of what 

they usually do in this activity. I am fairly stunned by it, and I 

think it is disgraceful. I think that they had a very bad day in the 

Senate hearing when this information was brought into public 

light. 

20 

Is this the kind of thing where if they have a contractual—if one 

arm of that massive firm is doing that activity and another arm is 

doing legitimate contracting activity with the IRS, is that something you might evaluate relative to your continued participation 

with them as a contract entity in light of their corporate conduct 

at large? 

Mr. EVERSON. I think that is a question that is really probably 

best addressed to the Office of Management and Budget (OMB) and 

to the Office of Federal Procurement Policy because of their overall 

supervision of procurement practices. It is clearly legitimate for the 

government to hold Federal contractors to higher standards in 

some instances than would be the case between normal commercial 

relationships or parties in the private sector, and the government 

does do that. The government asks for additional information on 

certain areas—have there have been Equal Employment Opportunity complaints, just as an example. There are considerations 

that enter into procurement decisions as they are taken. 

So, without getting into the real merits of what you are asking, 

which would obviously have to be fact-based considerations and 

couldn’t rely on simply a hearing, no matter how compelling, you 

would have to have had some action that would have taken place 

administratively or in the courts before you would consider an action. The OMB does occasionally say, as it did with some of the big 

corporations that got into problems, like Arthur Anderson and others, that they are disbarred from participating in Federal contracts. 

So, that is looked at, but I would suggest to you it is more an OMB 

action. 

Mr. POMEROY. I think that answer—I know I am done, but I 

just have a summary point, Mr. Chairman. Your answer is a little 

too circumspect for me. In other words, I think that the—— 

Mr. EVERSON. I thought you might react that way. 

[Laughter.] 

Mr. POMEROY. I think you have a role here. I am aware of a 

memorandum within this concern that assessed the potential profit 

from marketing these activities against the potential downside in 

terms of the structural fines, and they said even if we are fined, 

it is still a net plus for us. Well, we need to build in marketplace 

disincentives for those that don’t respond on businesses’ sheer honesty and honesty being the best policy. If they want to engage in 

this kind of conduct, we need to make certain that there is a business consequence that produces a net loss. 

Mr. EVERSON. Yes. 

Mr. POMEROY. So, beyond the fine, I would like these concerns 

to understand that their ability to do business with the Federal 

Government, the Federal Government that on the one hand they 

are ripping off, is forever placed—not forever, but for a period of 

time placed in great jeopardy. 

Mr. EVERSON. Mm-hmm. 

Mr. POMEROY. One aspect of their operation that is ripping off 

the government may jeopardize the full scope of business—— 

Mr. EVERSON. Right. 

Mr. POMEROY. They may otherwise do with the government. 

Mr. EVERSON. Let me put a finer point on it. Our job, first and 

foremost, is to address the substance of the problems. If we feel 

21 

that a professional services firm is violating promoter regulations 

or statutes, we have to address that, and we are addressing that 

in this area of abusive shelters. We have a very active set of programs, and where there has been misconduct, I believe that there 

will be consequences, and that is how I would leave it. 

Mr. POMEROY. Thank you. Thank you, Mr. Chairman. 

Chairman HOUGHTON. Mr. Commissioner, you know that this 

is a very bipartisan Committee. We walk in lockstep on many of 

these issues. We try not to be partisan. I am sitting between two 

of the finest Representatives we have in Congress, and I am really 

honored when I say this. I would like to then see if you can come 

up to this standard, to introduce Mr. Portman. 

[Laughter.] 

Mr. PORTMAN. I was looking to my right when he said that to 

see who he was talking about. 

[Laughter.] 

Thank you, Mr. Chairman, and thanks for your willingness to 

have this hearing and your continued oversight of the IRS. It is not 

something that Congress has done terribly well over the years, and 

I think with Mr. Houghton coming on the Subcommittee on Oversight, we have done a much better job of keeping track of what is 

going on and hopefully being a constructive partner. So, I thank 

you and your staff for continuing to do that. 

Here we are again. If you think about it, back in the mid-1990s, 

the reason the Restructuring and Reform Commission was started 

was not so much about all the things we ended up recommending 

to do with management and policy as it was about modernization, 

because it really came out of the frustration felt by the Appropriations Committees over appropriating more and more money toward 

a modernization program at that time which was alleged to have 

spent $3 billion. It was to little or no benefit to the taxpayer or to 

the government. 

We are not at that level yet, but I look at the GAO recommendations and its analysis, and we are going to hear from them in a moment, and we are beginning to get to the point where we are talking about hundreds of millions. This is a constant frustration. I 

know it is very complicated. The GAO says there are $290 million 

of cost overruns, a cumulative of 83.5 months of delay in major 

BSM projects. 

So, here we are again, and Commissioner, you are relatively new 

to this and therefore you have the ability both to look at it in a 

more objective manner, I believe, and also to be able to shake 

things up a little. It sounds like you are doing that. I think the recommendation of having the business units take direct leadership 

and ownership of the modernization projects is certainly a step in 

the right direction. My question is, is this more a management 

issue at the IRS or a contractor issue, and you have answered that 

earlier by saying you think it is both. 

With regard to the IRS problem, which is where this Committee 

has taken a big interest in the past in literally trying to restructure 

the IRS, and we have gone through that over the past few years 

and there has been a lot of disruption at the IRS in that process, 

has that disruption caused some of these problems? In other words, 

by changing our structure to focus in the three areas by literally 

22 

creating new positions—now you have two deputies, for instance— 

has that been part of the problem, that over this time period, the 

last 5 years, the IRS itself has been in somewhat of turmoil because of the changes. If that is part of the problem, what should 

we be doing about it? 

Mr. EVERSON. I think that the reforms that you took, creating 

business units, were sound. I think that remains the core of what 

you did in RRA 1998. I think that was a good reform. 

I do believe that what I did last June when I came in, which is 

to consolidate the staff functions under one deputy, was an important follow-on step to that because it was important that they cooperate and support each other. As I have said to many, in the private sector, the staff functions all work together because they don’t 

have the same juice that the manufacturing guys or the marketing 

people do who deliver the bottom line. In government, they are all 

fractured and they are impotent, so that things like common sense 

controls or good technology or good human resource practices are 

lost against the program managers who are running the businesses. 

By pulling them together and bringing them under the leadership of our Senior Operations Manager, the man who was running 

the Wage and Investment Division, the perspective is that they are 

accountable to the operators now, which was not what the going 

model was. 

I don’t think that the changes through the reorganization have 

contributed to this problem. In fact, I think that Charles Rossotti 

and the people in the IRS did a spectacular job of standing up the 

new organizations, and I admire everybody for the tremendous job 

they did, how relatively pain-free, from my perspective, that was 

accomplished, and the great improvements in service, with which 

you are familiar, that took place at the same time. A lot of times, 

you get a lag effect where service hasn’t gotten better because you 

are consumed in the reorganization. 

The IRS did both. It reorganized and—— 

Mr. PORTMAN. Improved service. 

Mr. EVERSON. It improved service. That is a phenomenal accomplishment. Now, as you know, we did it at the expense of enforcement. We are redirecting resources to that, and we are working on it, but now we are also bringing in closer these support functions. One of my obligations, I have talked to all three of you about 

it, is to make sure we run the organization efficiently and economically, and we are doing that as we restructure elements of the work 

force, and this technology is a piece of it. 

No, I don’t think that there has been anything out of sequence 

here. I think it is a good sequence, and it is working. 

Mr. PORTMAN. To what do you attribute the management failure of this? Now, I am getting to the contractor issue in a moment, 

but in the Restructuring and Reform Commission, we actually 

found, as I recall, that the IRS was not contracting too much, and 

I understand Mr. Pomeroy’s point of view on the outsourcing and 

the contracting concerns and the oversight concerns. Our concern, 

as I recall, was more based on analysis that the IRS was trying to 

do too much in-house. For example, there were some programs that 

23 

were literally off-the-shelf programs that could have been used and 

instead the IRS insisted on recreating the wheel. 

We also found that the management structure, the culture of the 

management was risk averse. We found that there was kind of a 

consensus-oriented management structure and a style that diffused 

leadership and decision making and didn’t take responsibility or accountability, and through that, people down the line were able to 

stop progress in its tracks and yet have no accountability for that. 

Part of what we have tried to do these last 5 years in Congress, 

as you know, is to improve on that, but my question to you is, are 

those problems still there? Is it the stovepipe problem, which is 

clearly a problem—literally a problem in terms of your computer 

system? It still is, and that is part of what we are trying to overcome with the modernization program, but there was also this 

stovepipe sense of—— 

Mr. EVERSON. Right. 

Mr. PORTMAN. Having the various units from audit to collection 

to information not working together toward modernization. How 

would you analyze what your management problems are in terms 

of the failures to achieve the goals, forgetting again the contractor 

side of it—— 

Mr. EVERSON. Yes. 

Mr. PORTMAN. What would you suggest to address those, or 

have you already addressed them? 

Mr. EVERSON. Let me center my response on these cultural observations that you have made, which I think are correct and I 

think, in fact, were perpetuated by the way we have managed 

these projects. We have attempted to achieve consensus in the 

management of these projects and I don’t think that is a sensible 

way to approach this. It is important to achieve buy-in. It is not 

best practice to achieve consensus when you are making difficult 

decisions like these—the tenets of creating these vast systems—because that does give everybody the right to circle back and have yet 

one more change, and the process runs 30 or 50 weeks when it 

should run 5 or 10, and that is what happened here. 

I was rather shocked, and as you know, when I got to the IRS 

and we had something like 40 different committees, and there was 

one committee on the modernization and I saw the minutes of it 

and it had 40 people attending the meeting. You don’t get something done with 40 people trying to discuss a computer system. 

That is not correct, because what you do in that model, in my view, 

is you dumb it down. The guy from GAO says, ‘‘Well, we really 

shouldn’t do that.’’ The person from OMB says, ‘‘Well, we can’t do 

that.’’ The person from the U.S. Department of the Treasury says, 

‘‘We shouldn’t do that.’’ The person from the operating unit says, 

‘‘We can’t do that.’’ 

Before you know it, you have taken a lot of the meat out of what 

you need to do. This is all about making tough decisions, and 

standardization, just as you indicated—buying things that get the 

job done at a reasonable cost but may not be the Cadillac, when 

they are available on the outside, and not insisting that it needs 

to be customized and taking forever to get it done. 

So, I do think we had a culture that was, as you indicated, risk 

averse. I remember when Todd Grams, who moved over to be the 

24 

Chief Information Officer, he was our Chief Financial Officer. He 

came and briefed me when I was still at OMB and said there are 

no consequences for failure. I would actually suggest to you that 

the action we took yesterday is the first time in the course of this 

most recent program that there has been a consequence, a real consequence. So, we are trying to change those cultures and those behaviors. 

Mr. PORTMAN. Again, we are going to hear later from the contractor and also from the Oversight Board—I see Larry Levitan is 

here—and from your consultant. I guess my only thought is from 

the experience we had going back to the mid-1990s is that changes 

in the IRS side, forgetting the contractor for a moment, seem to me 

to be critical if we are going to make these targets going forward. 

I hope you will continue to focus on that. I think your announcement this morning of the actions you took yesterday is a very positive step and the competition is important, but we also need to 

focus on the accountability, as you talked about, and the buy-in 

and not the consensus. 

Mr. EVERSON. Absolutely. 

Mr. PORTMAN. Thank you, Mr. Commissioner. Thank you, Mr. 

Chairman. 

Chairman HOUGHTON. Thank you. We have been joined by Mr. 

Weller, and we are going to pass him at the moment because he 

doesn’t have a particular question, but Mr. Pomeroy has got one. 

If you think of anything later on, please chime in. 

Mr. POMEROY. Thank you, Mr. Chairman. Lately, we have seen 

an awful lot of what we would have believed to be service work of 

a technical nature performed in this country moved to India or 

other places, and I am wondering if one of the things you monitor 

in the performance of the contract is whether or not the work on 

the IRS is being done within this country. 

Mr. EVERSON. I haven’t thought of that issue, and I will have 

to ask that question, frankly. I don’t know whether CSC or any of 

the subcontractors that participate with us are doing anything 

overseas. I just don’t know the answer to that, and we will find 

that out. 

Mr. POMEROY. I will ask them, as well, but obviously there are 

sensitivities about having our tax system performed on with work 

by contractors out of the country. We would certainly want to have 

this type of project performed in this country, and so I would put 

that on your list of things to keep an eye on. Thank you, Mr. Chairman. 

Chairman HOUGHTON. Mr. Portman, have you got any other 

questions? 

Mr. PORTMAN. No. 

Chairman HOUGHTON. Have you got one? 

Mr. WELLER. Mr. Chairman? 

Chairman HOUGHTON. Yes, please. 

Mr. WELLER. Commissioner, thank you for joining us this morning. I would echo my friend, Mr. Pomeroy’s, concerns. I think that 

is a legitimate question that all taxpayers would have if contractors 

were to send offshore the work. That would be a great concern to 

both parties, and I certainly want to echo the question that he 

asked. 

25 

[Additional information submitted by Mr. Weller follows:] 

Washington, DC 20515 

February 25, 2004 

The Honorable Mark Everson 

Commissioner 

Internal Revenue Service 

1111 Constitution Avenue, NW 

Washington, DC 20224 

Dear Mr. Commissioner: 

I am writing you today regarding the Administrations’ competitive sourcing initiative and the potentially damaging impact it may have on my district. 

As part of the initiative, the Internal Revenue Service’s Central Area Distribution 

Center in Bloomington is subject to bidding by public and private contractors. After 

contacting your Congressional Affairs staff, I learned that a decision will be made 

on approximately Wednesday, April 14, 2004. With over 500 jobs at stake, this is 

a disturbing, potentially damaging development. 

I support the Administrations goal of bringing more efficient, lower-cost government to the American people. However, with this many jobs at stake in an area that 

has been hard hit by the downturn in employment of the last few years, these jobs 

will not likely be replaced. 

The deciding factor the IRS is using to determine how best to administer the Distribution Centers is cost-effectiveness. To that end, I offer this resolution. Regardless of whether the Federal Government or a contractor receives the right to manage the IRS Distribution Centers, I believe the most effective option would be to 

consolidate operations by closing the two facilities in Rancho Cordova, CA and Richmond, VA and move those facilities duties to the Bloomington location. By closing 

the two facilities on the coast, you would reduce the overall number of employees 

necessary to operate all three facilities, with the added advantage of having a Distribution Center centrally located within the Nation, allowing for equal service ability nation-wide. 

Thank you for your assistance on this issue. I look forward to working with you 

on finding a positive resolution to this difficult situation. 

Sincerely, 

Jerry Weller 

Member of Congress 

Washington, DC 20515 

March 5, 2004 

The Honorable Mark Everson 

Commissioner 

Internal Revenue Service 

1111 Constitution Avenue, N.W. 

Washington, DC 20224 

Dear Mr. Commissioner: 

My letter serves to update you on my findings after visiting the IRS service center 

in Bloomington, Illinois, and to seek your assistance for the center’s employees. I 

am disturbed and disappointed to learn that employees have been told that employees must make decisions on buyouts before the future of the center has been decided. 

It was brought to my attention that the employees at this facility were given a 

letter and a form on February 29, 2004 for a buyout package to return no later than 

March 20, 2004. While this option was taken advantage of by several employees who 

found it an attractive time to leave, there are many more who would rather remain 

employed at the facility, and would prefer to wait until the announcement has been 

made on what will happen to their jobs. 

As the deadline to apply for buyout occurs approximately one month prior to the 

announcement regarding the fate of this facility and the people who work there, I 

ask you to extend the deadline to apply for buyout, or offer another buyout opportunity after the IRS makes it’s announcement. This will allow employees who have 

submitted buyout applications under some duress to rescind them, and reapply later 

26 

should they ultimately decide they would like to be bought out. Additionally, for employees who prefer to wait, but are feeling pressured to make a decision, this will 

give them some time and peace of mind to make a more fully informed choice. 

I hope you will agree with me that this is a fundamental issue of fairness. Please 

extend the deadline to submit an application for buyout, or offer another opportunity for buyout after the IRS announces it’s decision whether to keep the facility 

open. 

I look forward to working with you to modernize and streamline the IRS while 

ensuring it’s employees are treated fairly. 

Sincerely, 

Jerry Weller 

f 

Member of Congress 

I think probably the most basic question, which I believe just 

from reviewing what has been discussed this morning, is when will 

the taxpayers begin to see the benefits? When will the taxpayers 

begin to see the results of the computer systems modernization? I 

know in the 9 years that I have served in the Congress, we have 

been talking about this. When are we actually going to see the results of the massive investment that taxpayers have made in modernizing the computer systems for the IRS? 

Mr. EVERSON. I think that it is fair to say that you are already 

seeing the results in many, many dimensions. As I was indicating 

before you came in, we have been successful, and the contractor 

has been successful, in a suite of applications that help the taxpayer directly and that help practitioners. So, these projects, like 

e-services, giving Employment Identification Numbers, providing 

transcripts of key data, and the history of an account to a practitioner, all those things are happening. We have been successful 

doing that. 

You can see the results in enhanced rate of electronic filing. If 

you look at things like the downloading of forms and regulations 

that are occurring now, it is almost up to a billion a year. Think 

about the savings you are getting there because you don’t have to 

call to ask someone for a form and then the form goes to one of 

our distribution centers and gets mailed to you. You can just pull 

it off online. There is a lot of progress. 

The problem we have had here, though, is on these major systems, the updating of the master file and also the infrastructure we 

will start to use. Our expectation is that this the first module of 

the CADE project, which is the master file updating, will actually 

be working this summer for a subsection of 1040EZ filers, several 

million people. Now, it will be a while before you get the follow on 

modules that increasingly pick up other taxpayers. So, this remains, as to the big projects, the master file update, a multi-year 

effort, and that will take a lot of time. 

Mr. WELLER. I believe that we have invested about $8 billion 

so far in modernization. That is the estimated cost of the overall 

modernization. Is that figure accurate? 

Mr. EVERSON. I presume that in that figure you are going back 

to what Mr. Portman was talking about. If you look at the entire 

life cycle over—— 

Mr. WELLER. Right. 

27 

Mr. EVERSON. Back into the early 1990s, a lot of that had no 

benefit whatsoever. 

Mr. WELLER. Yes. Now, you have stated the benefits that you 

have been able to identify that taxpayers are now currently receiving. If we were to compare that to a private sector, say, a credit 

card institution or bank or insurance company, how today would 

you rate the level of service as a result of the modernization compared to what a customer would receive from their bank or financial institution? 

Mr. EVERSON. I think it is improving. I don’t think we could 

say that it is quite yet at the level that I would consider best practice. A good example would be our telephone routing and technology. We have got this large center down in Atlanta that routes 

telephone calls so that if you have got a question about charitable 

contributions, it goes to the right person in one of our two dozen 

or so call centers, and to an individual who knows about that subject, and it is also sequenced correctly so that you don’t have to 

wait too long because of a busy signal. 

I was in a local shop in Arlington just a week ago and a fellow 

who does picture framing for me said, ‘‘You know, I used to call the 

IRS and I used to have to always call on my lunch hour because 

I knew it would take me the full hour to do the business. Now 

when I call, I get right through,’’ he said, ‘‘and unfortunately, at 

the end of the conversation I have usually concluded that you are 

right and I am wrong.’’ 

[Laughter.] 

So, I think things are getting better. I wouldn’t tell you we are 

best practice yet, though, but we are going to continue to work on 

it. 

Mr. WELLER. Just in follow-up and my last question here, we 

always establish benchmarks—— 

Mr. EVERSON. Yes. 

Mr. WELLER. That we measure improvement and measure performance. As we look at the coming year, this fiscal year that we 

are currently in, the 2004 fiscal year, between now and the end of 

this year, what benchmark do you believe that we in Congress 

should use to measure the progress as you continue to implement 

and move through the modernization process to demonstrate the 

benefits that we will be able to measure progress? 

Mr. EVERSON. In terms of the modernization program itself, I 

think that you need to look at a variety of indicators. Some of them 

are volumes, as I indicated, the percentage of electronic filing, or 

others are more qualitative, like level of service. We track level of 

service, which is a concept that does get to this issue of 

benchmarking against comparable kinds of activities where someone is dealing with a reservation system, those kinds of issues. So, 

we have a variety of indicators that we track that are summarized, 

to which we hold ourselves accountable. 

The problem that you have got here, that we are really talking 

about this morning, is hitting delivery dates, and as the Chairman 

indicated, controlling costs. I would suggest to you that in many instances, when we finally get some of these things online, we are 

getting the functionality that we have sought. 

Mr. WELLER. Thank you. Thank you, Mr. Chairman. 

28 

Chairman HOUGHTON. Mr. Portman? 

Mr. PORTMAN. Mr. Chairman, thank you. Just one quick followup. It seems to me one of the ways to follow on Mr. Weller’s question, and I appreciate his backing up and saying, what is this all 

about for the taxpayers, because I think that we have made some 

progress. We need to acknowledge that, and now we need to get 

into the underpinnings and the CADE is the obvious example 

there. 

Mr. EVERSON. Yes. 

Mr. PORTMAN. Our CADE is one of the programs that you have 

talked a lot about since coming on last summer, and I think we all 

acknowledge the importance of getting that up and going. 

In your testimony, written testimony, you mention that as a 

milestone. The other one would be the IFS project. Those two seem 

to me ones where you believe that we are close to achieving at least 

significant progress, and by that, I mean within the next year. Are 

those milestones we should hold you and the IRS accountable for? 

Are those programs which, instead of talking about the overall 

BSM, can we talk about those two as projects that within the calendar year 2004 we expect to make significant progress on? 

Mr. EVERSON. I think that is entirely correct. Let me say on 

the financial system, this is what gave rise to the action we took 

yesterday. We had expected to deliver the first big block of that in 

April. That was a date that had rolled over from the beginning of 

this fiscal year, that is to say October 1st, and that is now going 

to be delayed until the end of this fiscal year. 

I still believe that there is no reason why that shouldn’t happen. 

This is just a SAP financial system. The SAP financial systems 

have been put in complicated corporations across the world for a 

decade or more, so we ought to be able to do this. 

What is difficult in that, and also in the first big piece about 

CADE, is the linkage back into the legacy systems. The IRS did a 

lousy job documenting all the systems changes that it made over 

the many decades. Because nothing was really brought current in 

terms of new investments over those periods of time, every time 

you try to patch back to your human resources system or your procurement system, if you are talking about the financial piece, or if 

you try to go back into the code on CADE to see what changes were 

made when the code was revised in 1986 or in the next year or the 

next year after that, this has been one huge stumbling block that 

affects both projects. I am sure your subsequent panelist, Mr. 

Cofoni, will address that. It has been a really difficult area, in large 

part because the code was never—this is the software code—was 

never properly documented. 

So, that is one issue, and I think that is being addressed, and 

there has been success in testing on the balance and control, which 

was a big issue associated with CADE, and the contractor and the 

IRS now feel better about this first module, which is the 1040EZ, 

coming through. 

The trick will probably not be, I would suggest, achieving this 

first piece, which will only be a narrow strip of taxpayers. It will 

be the follow on work where there is something called the business 

rules engine that will help you chart a future path to be able to 

adjust to all the changes that you gentlemen make to the Tax Code 

29 

and to keep this a flexible tool. Setting that up is critical, and you 

will hear about that from one of your later witnesses. That is a 

whole second area that I would say is very significant, about which 

we are concerned. We think we have a good approach here, but we 

are going to need to very much follow that. 

So, the answer is yes, I think both of those deliveries, the first 

piece of CADE and IFS, will happen. We are accountable for that. 

We are accountable with the contractor. If neither of those happen, 

we will take further actions on this that would be even more draconian than what was taken today. 

Mr. PORTMAN. Thank you. Given what has happened, again, 

not just in the last few years but looking back over the last decade, 

it would seem to me that would make sense, Mr. Chairman, for us 

to focus on a couple of these deliverables, including that first module in CADE, within this calendar year and even before we go into 

recess, because it sounds like that is about where the fiscal year 

ends. 

You have a lot of support in this Subcommittee, as you have seen 

this morning, on both sides of the aisle, and it is support that is 

cautiously optimistic, that with your leadership, we can get this 

done. We need some deliverables, and we are glad that you have 

rolled up your sleeves and jumped into this with such intensity. We 

expect and hope you will continue that. Thank you, Mr. Chairman. 

Mr. EVERSON. Thank you. 

Chairman HOUGHTON. Help me here. Boil this down. Computer systems modernization has got two phases, one, the specific 

things you are trying to do now such as the master files update, 

and then also the quality and the service and the documentation 

and the code changes. What specifically do you want to get done 

this year? Just restate that. 

Mr. EVERSON. I think, as your colleague, Mr. Portman, just indicated, the two things that I am really looking to do are the same 

two things that I was looking to do when I was at my confirmation 

hearing in March 2003. They are, unfortunately, a year later now. 

They are the first big block on the financial system, IFS, because 

there will be some follow on work in subsequent periods for that 

and this first piece of CADE, the 1040EZ filers, that will prove the 

concept of the new CADE and the linkage back into the legacy systems. Those two are the big ticket items. 

Chairman HOUGHTON. So, that is what we can look forward to 

quizzing you on next year? 

Mr. EVERSON. That is correct. 

[Laughter.] 

I hope it is not quizzing. I hope that we are all saying, well, good, 

we have turned some corners here, and that with the changes you 

have made and with the improved performance by the contractor 

that we have seen some real deliverables. 

Chairman HOUGHTON. Okay. I have just got one other question. The press reports today indicate that the GAO has found that 

27,000 defense contractors owe about $3 billion in back taxes. Have 

you got any comments on that? 

Mr. EVERSON. In fact, I am heading right over to testify before 

Senators Coleman and Levin on just this issue in just a minute. 

What has been indicated here is that the IRS and the U.S. DepartVerDate May 04 2004 07:08 May 21, 2004 Jkt 093604 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A93550.XXX A93550
30 

ment of Defense haven’t adequately followed up on potentially leviable debts that contractors to the government have. They haven’t 

paid their taxes but they are still doing business with the Department of Defense. 

The President’s budget request, which will provide over 1,000 

new people in collections officers, will help. We are looking at this 

issue. I am going to be testifying to the fact that we are going to 

make some short-term procedural changes. They are already underway. 

There are statutory concerns here because what you have is two 

competing public policy interests. The first is the protection of taxpayer rights, which there are many procedural protections written 

into the law, some through RRA 1998. There are also privacy concerns. On the other hand, there is a legitimate expectation that if 

you are doing business with the government, you should pay what 

you owe. Those two intersect, and they don’t intersect in a positive 

way. So, there may be some statutory changes at which the Congress needs to look. 

Beyond that, I would say we are very anxious to help our collection efforts. As you know, in the budget we are asking for the ability to take a strip, just a small strip, of the moneys due and have 

private collection agencies help us do that, but, as you have heard 

me testify before, with full taxpayer rights. So, I am hopeful we can 

make some progress in this area, Mr. Chairman. 

Chairman HOUGHTON. Mr. Commissioner, thank you very 

much for being here. We appreciate it. Good luck in your further 

testimony. 

Mr. EVERSON. Thank you, gentlemen. 

[Additional questions submitted by Chairman Houghton to Mr. 

Everson, and his responses follow:] 

Question: Many state tax agencies have completed successful modernization programs while the IRS has faced cost overruns and delays. On the 

subject of IRS reorganization of its management team relating to computer 

modernization, what are the plans to add people and/or contracts that have 

been part of a prior successful tax modernization project? 

Answer: The IRS Business Systems Modernization (BSM) program is as complex 

and challenging as any information technology program in the world. When nominated in January 2003, I made it one of my top priorities to evaluate the BSM program. I spoke with IRS senior executives and other federal government officials as 

well as outside business leaders and executives to learn about the BSM initiative. 

Realizing that the modernization program will only be successful if the most senior and experienced IRS executives take ownership of the program, I immediately 

identified the need to strengthen the BSM executive management team. I appointed 

John Dalrymple, a 30-year veteran of the IRS who has spent his career focusing on 

frontline taxpayer issues, to become the Deputy Commissioner for Operations Support. I also appointed the IRS CFO, Todd Grams, to the CIO position to bring better 

financial and management discipline to the technology modernization program. 

I expected the IRS would achieve key milestones in the summer and fall of 2003 

by delivering the initial release of the Customer Account Data Engine (CADE) program in August and the Integrated Financial System (IFS) in October. By late summer, it became painfully clear that CADE and IFS would experience substantial cost 

overruns and delays. With these two major project setbacks, it was evident that significant problems still existed with the BSM program. 

Even before these further delays became clear, the PRIME contractor, CSC, and 

I commissioned three external independent studies to assess the health of the modernization program and to review specific projects such as the CADE program. Bain 

and Co., Carnegie Mellon Software Engineering Institute (SEI), and GartnerGroup 

conducted these comprehensive assessments during the summer of 2003. 

The IRS developed a 46-item action plan based on feedback from these external 

reviews. The IRS added two more items after reviewing recommendations the IRS 

31 

Oversight Board submitted, bringing the total to 48 action items. These recommendations revolved around strengthening the BSM executive management team 

and clearly defining the roles and responsibilities between the IRS and the PRIME. 

As a result, I re-assigned experienced IRS business leaders to the modernization 

program. I asked Rich Morgante, the Deputy Commissioner for the Tax Exempt and 

Government Entities Division, to join the modernization executive management 

team to oversee the implementation of the recommended action items. I also asked 

John Duder, the Deputy Commissioner, Wage and Investment Division, to focus on 

delivering the CADE project. 

The IRS also retained a leading executive search firm to conduct searches for five 

key executive positions in the modernization program. One of these searches is in 

final negotiations. These external searches will provide the IRS with candidates who 

have a wide-range of diverse experience in systems modernization. 

The SEI will also periodically review the CADE program, and we are hiring a 

third party firm to regularly assess the overall health of the BSM program. Furthermore, I decided to direct the new enforcement projects scheduled for later this year 

and early next year to other contracts. 

All of these measures—combined with the fact that world-class firms like IBM, 

SAP, BearingPoint, Unisys, and Northrop Grumman are also engaged in the BSM 

program—should help us gain better control over future cost overruns and project 

delays. 

Question: I am concerned about taxpayer compliance and debt collection. 

Most financial services companies and state tax agencies have implemented modern compliance systems to ensure delinquent debts are collected. You have placed an increased emphasis on enforcement and proposed a new Filing & Payment Compliance (F&PC) initiative that would 

bring in billions of dollars of additional revenue each year. What is currently being done to ensure that this project will move forward, while the 

Business Systems Modernization initiative is being reexamined? 

Answer: The BSM initiative is a key part of our broader agenda at the IRS. Our 

focus is service + enforcement = compliance. While the IRS is continually improving 

service to make it easier for taxpayers to understand and comply with the tax laws, 

it is simultaneously boosting its enforcement initiatives. 

Seeing as billions and billions of dollars are lost in tax revenue each year, President Bush’s FY 2005 budget submission requests an additional $300 million over 

the FY 2004 consolidated appropriations level for enforcement activities. The IRS 

has begun to address this tax gap crisis by shifting badly needed resources and hiring more frontline enforcement personnel, who will focus primarily on noncompliance among high income individuals and businesses. 

The Filing & Payment Compliance (F&PC) project is funded to start in FY 2005. 

The first steps in implementing the new F&PC series of projects—which we often 

call Collection Contract Support—involve using private collection agencies. It will 

provide support to enable private collection agencies to supplement the IRS’s internal collection staff; however, using private collection agencies to resolve delinquent 

taxpayer cases requires enabling legislation (for which I ask your support). 

f 

Chairman HOUGHTON. We are now going to have a panel consisting of Larry Levitan, who is a Member of the IRS Oversight 

Board; Steve Palmquist, Chief Engineer for Civil and Intelligence 

Agencies at Carnegie Mellon University in Arlington; Robert 

Dacey, Director of the Accounting and Information Management 

Division of the GAO; and Paul Cofoni, President of the Federal Sector and Corporate Vice President of CSC. 

Larry, good to see you again, and would you commence with your 

testimony. 

STATEMENT OF THE HONORABLE LARRY LEVITAN, MEMBER, 

INTERNAL REVENUE SERVICE OVERSIGHT BOARD 

Mr. LEVITAN. Good morning. Mr. Chairman, Members of the 

Subcommittee, my message today is somber, so I will dispense with 

any formalities and get right to my testimony. 

32 

During this past summer, the modernization program fell into a 

ditch, experiencing significant delays and budget overruns in virtually all of the projects underway. Although we are convinced that 

the overall modernization plan is sound and well designed, the 

challenge is executing that plan. 

Unfortunately, this is not the first ditch that the modernization 

program has fallen into. Since its inception 5 years ago, it has had, 

with few exceptions, a consistent track record of missed target 

dates and budget estimates. All seven major application projects 

the IRS has undertaken are both significantly over cost and behind 

schedule. 

Without making excuses, the modernization program is extremely large and complex with numerous risks. Programs of this 

scale, and there are very few, are never completed without some 

level of cost and schedule overruns. It is also important to recognize that the modernization program has had a number of important successes as described by the Commissioner. 

It should also be realized that Commissioner Everson and his executive teams are new to their responsibilities and to direction of 

the modernization program. As soon as the overruns described previously this summer became apparent, the Commissioner started a 

comprehensive review of modernization and has now initiated an 

aggressive program to address the problems. 

The Board has been impressed with the speed, thoroughness, and 

openness of this effort. The program of improvement identified by 

this effort has been started, and we believe that meaningful 

progress is being made. 

The problems experienced by the modernization program will not 

be solved easily or, in many cases, quickly. However, they can be 

solved. In its recently released report on the program, the Board 

makes nine specific recommendations. 

Number one, business unit management must take direct leadership and ownership of the modernization program, and in particular this must include defining the scope of each project, preparing realistic and attainable business cases, and controlling scope 

changes. 

Number two, create an environment of trust, confidence, and 

teamwork between the business units, the BSM and Information 

Technology Services organizations, and the PRIME. 

Number three, enhance the systems development life cycle methodology to support more accurate estimating of future work phases 

and put into place the necessary processes to ensure that the methodology is followed religiously. 

Number four, enhance the contracting process. 

Number five, significantly strengthen the experience and capabilities of the IRS’s BSM team. The capabilities of this team must 

be consistent with the scale and complexity of the modernization 

program. 

Number six, rationalize the oversight of the program to eliminate 

duplication and streamline the process. 

Number seven, the CADE project requires special attention. The 

CADE is the foundation of modernization. It is also by far the most 

costly, complex, largest, and longest running project within modVerDate May 04 2004 07:08 May 21, 2004 Jkt 093604 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HR\OC\A93550.XXX A93550
33 

ernization. Additional work is necessary to ensure that the development approach selected for this system will work effectively. 

Number eight, reduce the number of projects being conducted 

concurrently. Modernization currently has five major projects underway. As demonstrated by the program’s performance, neither 

the IRS nor the PRIME has the capability to manage and conduct 

this many projects at the same time. It is the Board’s view that as 

current work phases are completed, the number of projects should 

be reduced. As both the IRS and PRIME demonstrate they can 

strengthen their capabilities and improve their performance, the 

portfolio of concurrent projects can be increased. 

Number nine, the IRS Oversight Board has lost confidence in the 

leadership of the PRIME contracting team. This conclusion has 

been reached after observing performance and results for over 3 

years. There have been numerous commitments to enhance the capabilities of this team, improve its management processes, and deliver greater thought and management leadership. Overall results 

have not changed, however. Target dates and budgets are consistently missed. 

In fact, Mr. Chairman, just last week, the IRS was informed that 

the target date for IFS would have to be changed once again. In 

our view, this was the final straw. The Board now strongly recommends that the IRS consider all options for strengthening the 

capabilities of the PRIME contracting team. The time for strong, 

aggressive action is now. 

Mr. Chairman, our judgments may be harsh but are made because of our firm belief that the modernization program cannot be 

allowed to fail. The risk to the country is unacceptable. The IRS 

cannot continue to operate with the outmoded and inefficient systems and processes it uses today. Over time, the existing systems 

will become impossible to maintain, and at that point, the ability 

to administer our country’s tax system is at risk. 

We are convinced that the overall plan is sound and well designed. The challenge is executing that plan. Meaningful recommendations have been made by each of the groups involved in 

this recent reassessment. The Commissioner and his management 

team are committed to the improvement program and the IRS 

Oversight Board supports that plan and will continue to work with 

the IRS on this important effort. 

[The prepared statement of Mr. Levitan follows:] 

Statement of the Honorable Larry Levitan, Member, Internal Revenue 

Service Oversight Board 

Introduction and Summary 

Mr. Chairman, and members of the Subcommittee, thank you for holding this 

hearing and inviting me to testify. It is an honor for me to appear before your committee today on behalf of the IRS Oversight Board. My remarks today will be directed at the IRS’ efforts to modernize its computer systems. 

The long-term health and viability of the nation’s tax administration system rest 

upon the success of the IRS Business Systems Modernization program (BSM or 

Modernization). However, during this past summer, the BSM program suffered a serious setback. Virtually all of its ongoing projects experienced significant delays and 

budget overruns. 

Particularly troubling were continuing and unresolved problems with the Customer Account Data Engine (CADE)—the so-called ‘‘crown jewel’’ of Modernization— 

that will move taxpayers from the current antiquated tape-based system to a modern reliable data base. 

34 

To his credit, IRS Commissioner Mark W. Everson quickly called for a number 

of separate independent reviews of not only CADE, but the entire BSM portfolio of 

projects. While the assessments’ results are still preliminary, they make it clear 

that the IRS and its Prime contractor cannot continue to operate in a business-asusual manner. The IRS Oversight Board believes that the stakes are too high and 

BSM’s problems are too severe to be addressed with half-measures. They must be 

squarely addressed in rigorous and open fashion, and as soon as possible. 

Based on the findings and recommendations of the BSM reviews, Commissioner 

Everson recently launched an aggressive ‘‘action plan’’ to remedy the problems 

plaguing Modernization. Through this report, the Board makes nine specific recommendations for turning around the critical BSM program. 

They include having the IRS business units take greater leadership and ownership of BSM projects, enhancing the contracting processes, improving overall program management and focus, and reducing the number of BSM projects underway 

at the same time. 

Of great significance, the Board also strongly recommends that the Prime’s performance be closely monitored and, if significant improvements are not quickly demonstrated, a change should be made. 

On balance, the IRS Oversight Board is convinced that the overall Modernization 

plan is sound and well-designed. No one believes that the IRS should start over 

from scratch; a firm foundation and architecture are in place. However, the challenge for the IRS and the Prime remains how to execute that plan and successfully 

implement the new systems and processes on schedule and within budget. 

A Troubled History 

The BSM program is crucial to delivering better service to taxpayers and increasing the Agency’s efficiency and productivity. Over the past few years, some notable 

BSM projects and benefits were delivered. Indeed, tangible improvements in call 

routing, e-Filing and interactive services produced enhanced service for taxpayers 

and more efficient operations at the IRS. 

However, last summer, the BSM program appeared at the point of unraveling. 

Virtually all of the projects with a major impact on improving customer service and 

IRS’ internal operations and productivity were experiencing serious delays and cost 

overruns. 

• The Customer Account Data Engine (CADE), which will replace the IRS Master 

Files with a modern database management system and provide the foundation 

for other modernized applications, missed its Release 1 August ‘‘go-live’’ date. 

As of this report’s publication, a new target date was not finalized. 

• Very little work was done to confirm that the ‘‘business rules engine,’’ on which 

future CADE releases depend, will be able to handle the complexity and scale 

of the CADE data base. 

• The October ‘‘go-live’’ target date for the Integrated Financial System (IFS), 

which will eventually replace IRS’ old core financial systems, was missed. Release 1 was rescheduled for the spring of 2004 and work on Release 2 was deferred. Costs increased proportionately. 

• Modernized e-File, the platform for all internet tax return forms, was also delayed, increasing project cost. 

• The Custodial Accounting Project (CAP) project, which will provide the IRS 

with critical control and reporting capabilities, was also running significantly 

behind schedule and over budget. 

• E–Services, which provides a suite of web-based products to third-party users, 

is basically on schedule, but significantly over budget. 

Unfortunately, this was not the first time Modernization found itself in serious 

trouble. Cost overruns have become an all-too familiar story. Since its inception, 

BSM had, with few exceptions, a consistent track record of missed target dates and 

budget estimates. For example, the CADE project is now over two years behind 

schedule and has been re-scheduled four times. The only reason it is only $30 million over the original cost estimate is that the IRS converted CADE to a fixed-price 

contract shortly after the project first started to experience problems. 

CADE is not the only BSM project that has a track record of failure. This is a 

shared BSM problem. Overall, the e-Services project is 28 months behind schedule 

and $72 million over the original budget, due to both scope growth and cost increases. The IFS project is almost $50 million over the original cost estimate and 

although it is only two months behind schedule at present, there is no current firm 

estimate of when it will be delivered. In fact, all seven major application projects 

the IRS has undertaken are both over cost and behind schedule. 

35 

Getting Behind the Problem 

Why did this happen? How did BSM end up with a consistent track record of overruns? Without making excuses, the Modernization program is extremely large and 

complex with numerous risks. Programs of this scale, and there are very few, are 

never completed without some level of cost and schedule overruns. However, looking 

back with 20/20 hindsight, BSM’s problems are all too evident and severe. The following are some of the more prominent deficiencies. 

There was inadequate business unit ownership and sponsorship of projects. This 

resulted in unrealistic business cases and continuous project scope ‘‘creep’’. 

The much desired environment of trust, confidence and teamwork between the 

IRS business units, the BSM organization, the Information Technology Services 

(ITS) organization, and the Prime simply did not exist. In fact, the opposite was 

true, resulting in an inefficient working environment and, at times, finger pointing 

when problems arose. 

• The project life cycle methodology did not fully support the requirement to estimate future phases of the work. Moreover, the methodology was not always rigorously followed. At times, inappropriate shortcuts were taken in order to meet 

unrealistic target dates, further exacerbating problems. • The contracting process was highly inefficient. This caused significant extra 

overhead for both the Prime and IRS and at times, resulted in work being done 

without a contract or inappropriate contracts being used. • The BSM organization did not have the depth and breadth of skills and experience to adequately manage the Modernization program and the Prime contract. • As the program ran into more and more problems, additional layers of review 

and auditing were put into place by OMB, the Treasury Inspector General for 

Tax Administration (TIGTA), GAO, and Congress. While this may be understandable, given BSM’s history, it added significant overhead to program management. • Computer Sciences Corporation (CSC), the Prime team’s leader, did not demonstrate that it had the depth of leadership and experience to successfully carry 

out its responsibilities. The Prime team’s track record was marred by continuous delays, missed target dates and budget overruns. CSC did not supply the 

important thought and program leadership it was engaged to deliver. Up until 

the last few months, CSC was unable to develop a strong working relationship 

with the IRS’ executive leadership. • Based on all of the above factors, program productivity levels were extremely 

low. • The program schedule was too ambitious given the capabilities of both the IRS 

and the Prime. There were too many concurrent projects. More became less. 

It should be understood that Commissioner Everson and his executive team are 

new to their responsibilities and to the direction of the Modernization program. 

However, as soon as delays and overruns experienced this summer became apparent, the Commissioner launched a comprehensive review of Modernization. 

The Board was impressed with the speed, thoroughness and openness of this endeavor. It should also be noted that CSC participated fully with this effort and in 

fact, hired an independent organization to assess its own work. The program of improvements identified by the review process recently began and while a number of 

difficult decisions must still be made, the Board believes that meaningful progress 

is being made. Commissioner Everson is to be commended for his swift response. 

However, more must be done. 

The Board’s Recommendations 

The problems outlined in this report do not yield to quick or easy solutions. However, this does not mean the IRS is confronting a hopeless situation. BSM’s problems can be managed and solved. To this end, the Board makes the following nine 

recommendations which it believes will help set BSM back on the path to success. 

In most cases, they are consistent with those made by the independent experts engaged by the IRS and the Prime. In some cases, action has already started. 

Recommendation 1: The IRS business units must take direct leadership and 

ownership of the Modernization program and each of its projects. In particular, this 

must include defining the scope of each project, preparing realistic and attainable 

business cases and controlling scope changes throughout each project’s life cycle. 

The Deputy Commissioner for Operations Support assumed responsibility for this 

critical task and has already taken steps to insure that it is put into place. 

Recommendation 2: Create an environment of trust, confidence and teamwork 

between the business units, the BSM and ITS organizations, and the Prime. This 

is a cultural issue and will take time. The Deputy Commissioner for Operations 

36 

Support and the CIO have responsibility for this action. CSC is also actively involved. 

Recommendation 3: Enhance the systems development life cycle methodology to 

support more accurate estimates of future work phases and put into place the necessary processes to insure that the methodology is followed religiously. Again, this 

work is under way. 

Recommendation 4: Enhance the program’s contracting process and capabilities. 

Recommendation 5: Significantly strengthen the experience and capabilities of 

the BSM team. Its capabilities must be consistent with the scale and complexity of 

the Modernization program. This will require a meaningful number of outside hires 

from organizations, such as the Defense Department, that have experience with 

large, complex programs. 

Recommendation 6: Try to rationalize the oversight of the program to streamline the process and eliminate duplication. This will require a joint effort of the IRS, 

OMB, TIGTA, GAO, the Oversight Board and Congress. 

Recommendation 7: The CADE project requires special attention. CADE is the 

foundation of Modernization. It is also by far the most costly, complex, largest and 

longest running project within the BSM portfolio. As part of the review program initiated by the Commissioner, the Software Engineering Institute (SEI) was engaged 

to review CADE, with special emphasis on the systems architecture, conversion approach and the planned use of a ‘‘business rules engine’’ to make the development 

and maintenance of the system more efficient. 

SEI’s findings were generally supportive of the system design and the use of the 

business rules engine. However, SEI could not be sure that the engine could handle 

the size and complexity of the CADE system until the rules were defined and modeled. It recommended that a project to define and model the rules—a major effort— 

be conducted as soon as possible. The Board strongly supports this recommendation. 

Recommendation 8: Reduce the number of projects being conducted at the same 

time. Modernization currently has five major projects underway. As demonstrated 

by the BSM program’s performance, neither the IRS nor the Prime has the capability to manage and conduct this many projects at the same time. 

In addition, defining and modeling CADE’s business rules (as recommended 

above) will be a significant additional effort. The Board believes that as current 

work phases are completed, the number of projects should be reduced. This must 

happen carefully and over time, so that current work efforts are not lost. 

Admittedly, this will be a very difficult decision for the IRS to make. Each of the 

Modernization projects is important and brings significant business value. However, 

the Board strongly believes that such a step is absolutely necessary for the overall 

success of Modernization. As both the IRS and Prime demonstrate that they can 

strengthen their capabilities and improve their performance, the portfolio of concurrent projects can be increased. 

Recommendation 9: The IRS Oversight Board has lost confidence in the leadership of the Prime contracting team. This conclusion has been reached after observing performance and results for over three years. There have been numerous commitments to enhance the capability of this team, improve its management processes 

and deliver greater thought and management leadership. Overall results have not 

changed, target dates and budgets are consistently missed. In fact Mr. Chairman, 

just last week the IRS was informed that the target date for IFS would have to be 

changed once again. In our view this was the final straw. The Board now strongly 

recommends that the IRS consider all options for strengthening the capabilities of 

the Prime contracting team. The time for strong, aggressive action is now. 

The IRS Oversight Board now strongly recommends that the IRS take meaningful 

action to correct this problem. The IRS needs to consider alternative actions to correct this problem. 

Conclusion 

The IRS Oversight Board firmly believes that the IRS Modernization program 

cannot be allowed to fail. The IRS cannot continue to operate with the outmoded 

and inefficient systems and processes it uses today. Over time, the existing systems 

will become impossible to maintain and at that point, the ability to administer our 

country’s tax system will be in grave danger. Such a risk to our nation is unacceptable. We remain convinced that the overall Modernization plan is sound and welldesigned. The challenge is executing that plan. The IRS and the Prime must get 

it right this time. 

Meaningful recommendations were made by each of the groups involved in this 

recent reassessment to improve the management and execution of Modernization. 

In this same vein and spirit, the Board adds its constructive suggestions today. 

37 

The Commissioner and his management team are committed to a Modernization 

improvement program. The Oversight Board supports that plan and will continue 

to work with the IRS to make sure that this important effort succeeds. 

f 

Chairman HOUGHTON. Thank you, Mr. Levitan. Mr. 

Palmquist? 

STATEMENT OF M. STEVEN PALMQUIST, CHIEF ENGINEER 

FOR CIVIL AND INTELLIGENCE AGENCIES, ACQUISITION 

SUPPORT PROGRAM, SOFTWARE ENGINEERING INSTITUTE, 

CARNEGIE MELLON UNIVERSITY, PITTSBURGH, PENNSYLVANIA 

Mr. PALMQUIST. Mr. Chairman and Members of the Subcommittee, thank you for inviting me here today. My name is Steven Palmquist. I work for Carnegie Mellon University’s Software 

Engineering Institute (SEI), a federally funded research and development center with a mission to help government and industry improve their software engineering and acquisition practices. 

At the SEI, I am the Chief Engineer for Civil and Intelligence 

Agencies within our Acquisition Support Program. Today, I represent a team of 14 principal and senior members of our staff who 

performed an Independent Technical Assessment (ITA) of the IRS’ 

CADE program during the late summer and early fall of 2003. 

At the SEI, we have performed over 50 ITAs, usually at the request of senior Department of Defense and civil agency leaders 

when they have a program in trouble. For CADE, Commissioner 

Everson was our senior sponsor and we appreciated his candor and 

support. 

In each of the ITAs we have performed, we have been impressed 

with the dedication, intelligence, and resourcefulness of the people 

involved on both the government and the industry side. The CADE 

was no exception. This then forces a basic question. With all of 

these good, talented people, why is CADE failing? 

The answer is because CADE, unfortunately, is again not an exception. The CADE fell into the same traps that have crippled 

many other government and industry programs, both large and 

small. The CADE’s program planning has been deficient, its execution has been uncoordinated. Measurements and metrics have not 

been properly utilized, and risks have not been identified, profiled, 

and managed. 

In its simplest form, project management has two functions, plan 

the work and work the plan. This did not happen. Requirements 

in particular were not fully understood or communicated, and history has shown that budgets and schedules were unrealistic. 

We believe the CADE team needs to adopt a ‘‘back to basics’’ approach. First, they need to restore rigor and discipline in their 

management processes, both programmatic and technical. They 

must take a long-term total systems view of CADE through a solid 

systems engineering effort. They must begin the expensive but critical task of harvesting the business rules. They need to strengthen 

and support their current software development environment, but 

continue to investigate improvements to that environment, such as 

a business rules engine. Last, they should continue to seek outside 

38 

reviews of their program, a commercial best practice, and one of 

the key recommendations of the November 2000 report of the Defense Science Board on Defense Software. 

The CADE by its nature is high risk. We believe the CADE team 

can deliver. We believe the talent and the desire is there. It will 

not happen, however, until the IRS and its industry partners improve their management discipline. We did see evidence of improvements during our ITA. However, many of these processes are 

still not effectively executed and many are not backed by sufficient 

technical expertise and experience. 

In particular, we have significant concerns with the lack of emphasis on the harvesting of the business rules. There was also not 

enough information available to determine if the architecture is 

viable in Releases 3, 4, and 5, and we are especially concerned security is not adequately addressed as CADE moves from its current 

once a week batch processing environment to the more real-time 

interactive approach of Releases 3, 4, and 5. 

Mr. Chairman, thank you again for the opportunity to be here 

today. The SEI is proud of the work we did in supporting Commissioner Everson and the IRS, and I look forward to answering any 

questions you may have. 

[The prepared statement of Mr. Palmquist follows:] 

Statement of M. Steven Palmquist, Chief Engineer For Civil and Intelligence Agencies, Acquisition Support Program, Software Engineering Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania 

Introduction 

Mr. Chairman and members of the Subcommittee, thank you for inviting me to 

speak to you here today. My name is Steven Palmquist. I work for Carnegie Mellon 

University’s Software Engineering Institute. I am the Chief Engineer for civil and 

intelligence agencies in our Acquisition Support Program. My background includes 

licensure as a Professional Engineer and certification as a Project Management Professional. 

Today I represent a team of fourteen principal and senior members of our technical staff who performed an independent technical assessment of the IRS’s Customer Account Data Engine (CADE) program. This work was done in the late summer/early fall of 2003. 

What is the Software Engineering Institute? 

Founded in 1984, the Software Engineering Institute, or SEI as it is more-commonly known, is a federally funded research and development center (FFRDC). 

Sponsored by the U.S. Department of Defense, the SEI’s mission is to help DoD 

agencies, other government agencies and industry improve their software engineering and acquisition capabilities. 

What is an Independent Technical Assessment (ITA)? 

An Independent Technical Assessment, or ITA, is an objective examination of a 

project or program conducted by outside experts. As an FFRDC located at a major 

university, the SEI is fiercely protective of its credibility and neutrality in conducting these types of assessments. Because of our objectivity, senior military and 

civil agency executives often request we assess their software-intensive programs. 

To do this, we form a team with the appropriate mix of expertise drawn from across 

the Institute. We gather information through interviews, fact-finding visits to facilities, reviews of designs and software architectures, data reviews, and process reviews. We analyze this information and present our findings and recommendations 

to the senior executive sponsor. 

For CADE, IRS Commissioner Everson was our senior executive sponsor. 

Background of the CADE Program and the Critical Role of Business Rules 

In his May 20, 2003 testimony to the Annual IRS Restructuring and Reform Act 

of 1998 Joint Congressional Review, Commissioner Everson stated, ‘‘the centerpiece 

of the modernization effort is the replacement of the decades-old Master Files . . . 

39 

(with) a modern, reliable database, called the Customer Account Data Engine, or 

CADE.’’ IRS modernization thus depends on CADE. CADE, as we discovered, depends on business rules. 

The IRS and their industry partners agreed on a business rules approach for 

CADE in a contract awarded in December 1998. Simply put, a business rule is any 

statement that defines how a business conducts its business. For the IRS, business 

rules are principally representations of tax laws and tax forms. The potential benefit 

of a business rules system is the separation of the business logic from program logic. 

For example, a business rules approach would allow the IRS to easily change the 

rules to reflect new tax year changes without affecting the underlying computing environment. 

CADE’s original timetable called for five yearly software increments or releases. 

Release 1, scheduled for January 2002, was primarily the infrastructure needed for 

all CADE releases. It also contained the approximately 1,200 business rules needed 

to process 1040EZ filers. Subsequent CADE releases significantly increase both the 

number and complexity of business rules such that by Release5, all of CADE’s estimated 50,000 business rules are included. With Release 5, the IRS would process 

nearly all individual tax filers using CADE. 

The Release 1 business rules were originally to be coded using a business rules 

engine, a commercial software tool. A business rules engine interprets a formalized 

representation of the natural-language expression of a business rule to generate the 

software code that implements the business rule. A rules engine offers the promise 

of faster rules coding, which will be critical in CADE’s later releases, where the 

huge majority of rules reside. In fact, all of CADE’s future cost, schedule, and performance goals depend on the assumed efficiency of a rules engine. 

However, the Release 1 business rules engine effort stalled over contractual 

issues. The IRS’s industry partners then coded the business rules using the C++ 

programming language. This switch was one of the principal reasons Release 1 

missed the original January 2002 delivery date, which was rescheduled for August 

2003. However, the plan remained to use a business rules engine on subsequent releases, including a revised Release 1, so that all CADE business rules would still 

be implemented and managed by the rules engine. 

Background of the SEI’s ITA of CADE 

Because of the continued focus on a business rules engine, the IRS requested we 

perform a ‘‘health check’’ on its use on CADE. On July 1, 2003, we began this work. 

On July 25, 2003, however, Commissioner Everson announced that CADE Release 

1 would also miss the new August 2003 delivery date. Coincident with this announcement, Commissioner Everson expanded the scope of the health check to a full 

ITA of all of CADE. 

We completed the ITA and presented our report to Commissioner Everson in October 2003. In the four months since, both the IRS and their industry partners have 

worked on our findings and recommendations. We have not been involved in these 

efforts, so we have not updated our report. The following findings and recommendations, therefore, represent CADE as it stood in the late summer and early fall 

of2003. 

Principal Findings 

Delivery of Release 1 

We believe the IRS and its industry partners can deliver CADE Release 1—with 

the functionality/design as described to us during the ITA—by August or September 

of 2004. This is provided no new requirements emerge and the IRS and their industry partners agree to the acceptance criteria. As expressed to Commissioner 

Everson, our confidence in this date was approximately sixty percent. 

A Business Rules Approach 

We agree that a business rules approach offers the IRS a potentially significant 

capability to manage and improve their operations. Reaching that potential with a 

system as large as CADE, however, will require a more-disciplined approach and 

execution by both the IRS and their industry partners. As an example, at the time 

of our ITA there was no definitive evidence that the rules engine would perform 

adequately in the IRS’s operational environment or in their industry partners’ development, test, and maintenance environment. 

Long-term Vision 

We believe the current emphasis on Release 1 has been at the expense of a longterm perspective. Any complex software system involves balancing competing requirements of performance, security, interoperability, maintainability, modifiability, 

40 

etc.—commonly called the quality attributes. For CADE, those requirements are implemented in a sequence of coordinated steps in successive releases of the modernized system. The choices of the step content, and the balancing of these critical system properties, depend on how the IRS will use the modernized system at each 

stage. However, this analysis has not been adequately addressed for future releases. 

This is particularly true for security concerns as the IRS moves from its current 

‘‘lock down’’ security environment into the interactive environment of later CADE 

releases. 

Software Capability 

While a number of CADE’s problems can be attributed lapses in the industry 

partners’ software development processes, we believe the industry partners can deliver quality software. Recent improvements in systems engineering, measurement 

and metrics, and technical reviews have resulted in improved performance. However, several key development processes are still not effectively integrated, and 

there is no clear chain of command for technical decision-making. 

Management Capability 

We saw evidence that both the IRS and their industry partners are moving toward more effective management discipline. One example of this is the adoption of 

the Software Acquisition Capability Maturity Model (SA–CMM). However, not all 

their processes are effectively executed, and many are not backed by sufficient technical expertise and experience. Risk management, requirements management, staffing and talent retention, communications management and creating accurate budgets and schedules all remain areas of concern. 

Principal Recommendations 

Harvest the IRS Business Rules 

We believe that harvesting the business rules, not coding them, will drive the cost 

and schedule of future CADE releases. By harvesting, we mean capturing, adjudicating, and cataloging the rules. CADE has invested many resources exploring rules 

engines, but few resources exploring the rules themselves. The IRS needs to understand and document their business rules as well as the rules’ complicated interactions. Some of the delays that have already plagued CADE are a direct result of 

an imperfect understanding of the business rules. This situation will only grow as 

the number and complexity of the implemented rules increases. 

In addition, the IRS does not know the number of business rules in CADE with 

any reasonable degree of certainty. Therefore, no one knows how long rule harvesting will take, how many people will be required, the background, training and 

experience of the people required, or how much it will cost. Based on anecdotal information presented to us, we believe the time will be measured in years and cost 

will be measured in the tens of millions of dollars. 

Until sound, supported cost and schedule estimates for rule harvesting are available, future CADE plans and schedules are only tentative and likely subject to 

delays and missed milestones. 

Institutionalize Systems Engineering 

CADE needs a strong systems engineering approach to identify and handle programmatic and technical risks. To do this, the IRS’s industry partners need to establish a permanent CADE systems engineering group. We recommend the IRS and 

its industry partners use ‘‘model problems’’ to help understand the risks and potentially uncover new, critical unknowns. 

The IRS also needs dedicated system engineers to staff the systems engineering 

group. These persons would be responsible for understanding CADE’s technical 

issues, as well as the industry partners’ proposed solutions, for their impact on the 

IRS. In particular, the IRS should lead an integrated team to define, monitor, manage, and support operational security. This effort should be across not only CADE 

but also the entire modernization effort and the IRS’s legacy computing environment. 

Validate Business Rules Engines 

As stated earlier, all of CADE business rules are currently coded in C++. While 

this was not the original plan, it is the only design approach for which CADE has 

historical data, and the only approach validated in the CADE environment. Therefore, C++ is the baseline design approach and should be the basis for future planning. 

However, other design approaches—the rules engine, improving the C++ environment, or other programming options—should be examined. If they have merit, they 

should be rigorously validated in the CADE environment. If any of these alterVerDate May 04 2004 07:08 May 21, 2004 Jkt 093604 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HR\OC\A93550.XXX A93550
41 

natives prove superior(in terms of performance, risk, cost, schedule, etc.), they could 

then become the primary design approach. Coding the rules in C++ then becomes 

the fallback design approach, but one with known cost, schedule, and performance 

data. 

Institutionalize Management Discipline 

The IRS and its industry partners must both improve their management discipline. While the following list is in no way complete, we believe both parties 

should: 

• continue to build a collaborative, active management structure 

• establish real, supported risk management programs to aggressively identify 

and manage risk 

• improve their ability to jointly create realistic cost and schedule estimates 

• coordinate testing activities 

• create a baseline set of known requirements, and characterize the ‘‘known unknowns’’ for all releases 

• determine the communication needs of all CADE stakeholders, and lay out a 

plan for how needed information will be distributed, received and used 

• establish mechanisms to independently monitor these activities 

• capture lessons learned and feed the information forward to future activities 

Plan for Independent Oversight 

Because large, complex, software-intensive system acquisitions face a number of 

challenges, they often can benefit from experienced and trusted software expertise. 

For example, the Army’s Future Combat System (FCS) program has a software 

steering committee to help identify issues and risks and offer an overall ‘‘sanity 

check’’ one step removed from day-to-day operations. 

In the FCS model, both the government and contractor call on the members of 

the software steering committee. The group functions to advise, and not to critique, 

senior management. The group is a partner rather than another oversight body. Recent lessons learned from the first phase of the FCS program have cited the software steering committee as an indispensable factor in achieving program goals. 

A second type of oversight is an independent expert review, similar to our ITA. 

Independent expert reviews are an industry best practice and one of the key recommendations of the November 2000 Report of the Defense Science Board Task 

Force On Defense Software, issued by the Office of the Under Secretary of Defense 

For Acquisition and Technology. 

Independent expert reviews last one-to-two days and are held two to three times 

a year. The reviews are designed to help program teams ensure: 

• disciplined processes and methodologies are in place 

• the program is adequately resourced 

• the technical baseline is understood and solid, with attendant risks and opportunities identified and managed 

• adequate progress is being achieved 

To be effective, the independent expert reviews need to be part of CADE, with 

these two defining elements: 

• the reviews are scheduled parts of, not intrusions into, CADE’s management 

and development plans, schedules and processes 

• CADE’s program and technical management are robust and flexible enough to 

pursue the opportunities and address the weaknesses uncovered by the reviews 

Without these two conditions, the value of the reviews diminishes exponentially. 

Conclusion 

We commend the IRS and their industry partners for seeking review from outside 

sources. Incorporating insight and recommendations from other organizations (such 

as commercial financial organizations, other government agencies, academia, etc.) 

will yield a richer set of recommendations to help put CADE back on track. However, any recommendation—including our own—must be regularly evaluated for appropriateness in the CADE environment, as well as for their benefit to the IRS in 

terms of cost, schedule, and performance. 

Mr. Chairman, thank you again for the opportunity to be here today. The SEI is 

proud of the work we did supporting Commissioner Everson and the IRS. I look forward to answering any questions you may have. 

f 

42 

Chairman HOUGHTON. Thanks very much, Mr. Palmquist. Mr. 

Dacey? 

STATEMENT OF ROBERT F. DACEY, DIRECTOR, INFORMATION 

SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE 

Mr. DACEY. Mr. Chairman and Members of the Subcommittee, 

I am pleased to be here today to discuss IRS’ system modernization 

efforts. I will briefly summarize my written statement. 

The IRS’ attempts to modernize its aging computer system span 

many years. A history of continuing delays and design difficulties 

led to GAO designating IRS’s system modernization efforts as highrisk in 1995. The IRS’ current effort, BSM, was initiated in fiscal 

year 1999. To date, about $1.7 billion has been appropriated, including about $388 million for fiscal year 2004. 

To facilitate Congressional oversight of this program, annual appropriations laws have mandated that modernization funds not be 

available until IRS submits to the Appropriations Committees for 

approval a modernization expenditure plan that satisfies certain 

legislative conditions, including a review by GAO. We are currently 

reviewing the fiscal year 2004 expenditure plan. 

In prior reviews of these plans, we have identified numerous deficiencies in the BSM program and provided recommendations to 

address them, most importantly, balancing the pace of systems acquisition projects with the agency’s ability to manage them, and 

also establishing repeatable processes for acquiring software and 

improving modernization management controls and capabilities, 

such as those related to configuration management and cost and 

schedule estimating. 

In response to our recommendations, IRS has made important 

progress which the Commissioner discussed earlier this morning. 

Nevertheless, as we reported last June, IRS continued to face challenges to fully develop and implement its management capabilities. 

Our written testimony provides an analysis of the reported cost 

overruns and schedule delays that have affected most of the current BSM projects. In addition to the deficiencies I had previously 

discussed, our work has shown that the increases and delays were 

caused in part by several factors, including inadequate definitions 

of system requirements, increases in project scope, and underestimating project complexity. These schedule delays and cost overruns have impaired IRS’ ability to make appropriate decisions 

about investing in projects, have delayed the delivery of benefits to 

taxpayers, and postponed the resolution of material weaknesses in 

other IRS program areas. 

Given the continued cost overruns and schedule delays, IRS and 

CSC launched internal and independent assessments during 2003 

on the health of BSM as a whole and CADE in particular. These 

more in-depth and comprehensive assessments provided an analysis of BSM weaknesses and risks consistent with our prior findings that contributed to these delays. The assessments also provided actionable recommendations to address the weaknesses. 

Based on these assessments, IRS developed action plans for 46 

specific issues that it identified for resolution, 27 of which they 

have reported were completed at the end of last month. Also, IRS 

43 

1 U.S. General Accounting Office, High-Risk Series: An Overview, GAO/HR–95–1 (Washington, 

D.C.: February 1995). 2 U.S. General Accounting Office, High-Risk Series: An Update, GAO–03–119 (Washington, 

D.C.: January 2003). 3P.L. 108–199, Div. F, Title II, Jan. 23, 2004. IRS uses the appropriated totals to cover contractor costs related to the BSM program. IRS funds internal costs for managing BSM with another appropriation. These costs are not tracked separately for BSM-related activities. 4The other five legislative conditions are that the expenditure plan (1) meets Office of Management and Budget’s (OMB) capital planning and investment control review requirements; (2) 

complies with IRS’s enterprise architecture; (3) conforms with IRS’s enterprise life cycle methodology; (4) is approved by IRS, Treasury, and OMB; and (5) complies with federal acquisition 

rules, requirements, guidelines, and system acquisition management practices. 

has contracted with MITRE to conduct an independent analysis of 

the efficacy of these action plans. 

Significant further work remains to complete implementation of 

the remaining 19 issues. The IRS is also taking other action, such 

as planning to have SEI conduct further periodic reviews of the 

CADE project. Additionally, IRS is responding to recommendations 

from the Oversight Board, which Mr. Levitan summarized briefly 

a moment ago, and from the Treasury Inspector General for Tax 

Administration. The IRS has reported they expect to fully implement remaining open actions by the end of this calendar year. 

Commitment of appropriate resources and top management attention are critical to meeting these challenges and improving BSM 

performance. In addition, continuing oversight by Congress, OMB, 

and others, as well as ongoing assessments of the program, can assist IRS in strengthening the program. 

Mr. Chairman and Members of the Subcommittee, this concludes 

my statement. I will be pleased to answer any questions that you 

have. 

[The prepared statement of Mr. Dacey follows:] 

Statement of Robert F. Dacey, Director, Information Security Issues, U.S. 

General Accounting Office 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Internal Revenue Service’s (IRS) actions to modernize its computer systems. Although updated through the years, IRS’s 

set of computer systems is based on an architecture that dates from the 1960s. This 

architecture has inhibited IRS’s ability to effectively and efficiently perform its mission of providing service to taxpayers and enforcing the nation’s tax laws. However, 

IRS’s attempts to modernize its computer systems and underlying architecture now 

span three decades. Given the long history of continuing delays and design difficulties, we previously designated IRS’s modernization program as a high-risk area in 

1995.1 It remains so today.2

IRS’s current multibillion-dollar effort, known as the Business Systems Modernization (BSM) program, was initiated in fiscal year1999. IRS contracted with 

Computer Sciences Corporation (CSC) as the prime contractor to assist with designing, developing, and integrating a new set of information systems that were intended to replace IRS’s aging business and tax processing systems. To date, about 

$1.7 billion has been appropriated for the program, including about $388 million for 

fiscal year 2004.3

To facilitate congressional oversight of this program, annual appropriations laws 

since fiscal year 1998 have mandated that modernization funds not be available 

until IRS submits to the congressional appropriations committees for approval a 

modernization expenditure plan that satisfies six legislative conditions, including 

that it be reviewed by us.4 We are currently reviewing the fiscal year 2004 BSM 

expenditure plan. During our past reviews of such plans, we have noted numerous 

modernization management control deficiencies and made recommendations to correct them. Although IRS has made progress in implementing our recommendations, 

BSM continues to face significant challenges and serious risks. Recognizing these 

risks, IRS and CSC recently completed several in-depth and more comprehensive assessments on the health of the BSM program, including an independent technical 

44 

5The current system—referred to by IRS as the master files—contains taxpayer account and 

return data. There are master files for individuals, businesses, and employer retirement plans. 

A nonmaster file for taxpayer data also exists that cannot be stored in the other master files 

due to data format and space limitations. 6GAO/HR–95–1. 

7 U.S. General Accounting Office, Tax Systems Modernization: Management and Technical 

Weaknesses Must Be Corrected If Modernization Is to Succeed, GAO/AIMD–95–156 (Washington, D.C.: July 26, 1995) and Tax Systems Modernization: Blueprint Is a Good Start, But Not 

Yet Sufficiently Complete to Build or Acquire Systems, GAO/AIMD/GGD–98–54 (Washington, 

D.C.: Feb. 24, 1998). 

assessment of the Customer Account Data Engine (CADE) project, a project critical 

to the success of BSM. IRS has developed an action plan to address the assessments’ 

recommendations, and has begun to act on it. 

In my testimony today I will summarize our prior findings and recommendations 

and those of the recently completed program assessments. I will also discuss the actions IRS reports it has taken or plans to take to address issues raised by these 

assessments. 

In preparing this testimony, we relied on our prior reports and testimony on IRS’s 

systems modernization activities and BSM expenditure plans. We also reviewed and 

analyzed information contained in the BSM expenditure plan for fiscal year 2004; 

Carnegie Mellon University Software Engineering Institute’s (SEI) independent 

technical assessment of CADE; reports on the BSM program by the Treasury Inspector General for Tax Administration and the IRS Oversight Board; and IRS briefing materials (1) analyzing the root causes of BSM project cost increases and schedule delays, (2) independent reviews of CSC’s business processes and IRS’s procurement practices, and (3) IRS’s action plan to address issues identified by the reviews. 

We did not independently validate planned projects’ cost estimates or confirm, 

through system and project management documentation, the validity of IRS-provided information on the projects’ content and progress. Our work was performed 

during the past month, in accordance with generally accepted government auditing 

standards. 

Background 

The tax administration system that collects about $2 trillion in revenues each 

year is critically dependent on a collection of obsolete computer systems developed 

by the IRS over the last 40 years. IRS envisions a future in which its tax processing 

environment will be virtually paper-free, and up-to-date taxpayer information will 

be readily available to IRS employees to respond to taxpayer inquiries. To accomplish this, IRS embarked on its ambitious BSM program. BSM involves the development and delivery of a number of modernized business, data, and core infrastructure projects that are intended to provide improved and expanded service to taxpayers as well as IRS internal business efficiencies. Recognizing the long-term commitment needed to solve the problem of obsolete computer systems, Congress set up 

a special BSM account in fiscal year 1998 to fund IRS’s systems modernization efforts. 

IRS initiated CADE as part of BSM, to modernize the agency’s outdated and inefficient data management system.5 IRS also sees this project as the corporate data 

source enabling future customer service and financial management applications. 

CADE is therefore IRS’s linchpin modernization project. In light of the projects that 

depend on CADE, as well as the many interrelationships that are to exist among 

CADE and IRS’s modernized applications and among CADE and current IRS applications, the agency must manage this critical project effectively. Without CADE, the 

business systems modernization program cannot succeed. 

IRS Has Made Improvements, But Systems Modernization Program Remains High-Risk 

IRS’s attempts to modernize its aging computer systems span several decades. 

This long history of continuing delays and design difficulties led to our designating 

IRS’s Tax Systems Modernization program, BSM’s predecessor, as a high-risk area 

in 1995.6 During the mid-1990s we reported on several technical and management 

weaknesses associated with Tax Systems Modernization, a program that began in 

the 1980s. These weaknesses related to incomplete or inadequate strategic information management practices; immature software development capability; incomplete 

systems architecture, integration planning, system testing, and test planning practices; and the lack of an effective organizational structure to consistently manage 

and control systems modernization organizationwide. We made a series of recommendations for correcting these weaknesses and limiting modernization activities 

until they were corrected.7 IRS subsequently discontinued the program after the 

45 

8 U.S. General Accounting Office, Tax Systems Modernization: Results of Review of IRS’ 

March 7, 2000, Expenditure Plan, GAO/AIMD–00–175 (Washington, D.C.: May 24, 2000) and 

Tax Systems Modernization: Results of Review of IRS’ August 2000 Interim Spending Plan, 

GAO–01–91 (Washington, D.C.: Nov. 8, 2000). 9 U.S. General Accounting Office, Business Systems Modernization: IRS Needs to Better Balance Management Capacity with Systems Acquisition Workload, GAO–02–356 (Washington, 

D.C.: Feb. 28, 2002). 10 Carnegie Mellon University’s Software Engineering Institute has developed criteria, known 

as the Software Acquisition Capability Maturity ModelTM, for determining organizations’ software acquisition management effectiveness or maturity. A Level 2 organization has established 

its basic project management processes in the following key process areas: acquisition planning, 

solicitation, requirements development and management, project management, contract tracking 

and oversight, evaluation, and transition to support. 

agency had spent about $4 billion without receiving expected benefits. In fiscal year 

1999, IRS launched the BSM program. IRS contracted with CSC as its prime systems integration services contractor for systems modernization, helping it design 

new systems and identify other contractors to develop software and perform other 

tasks. 

In our reviews of IRS’s BSM expenditure plans, we have identified numerous deficiencies in the BSM program, including a continuation of the weaknesses noted 

above. Also, a consistent challenge for IRS has been to make sure that the pace of 

systems acquisition projects does not exceed the agency’s ability to manage them. 

In May and November 2000, we reported that projects were in fact getting ahead 

of the modernization management capacity that needed to be in place to manage 

them effectively.8 In February 2002 we reported that such an imbalance was due 

to IRS’s first priority and emphasis being on getting the newer, more modern systems—with their anticipated benefits to taxpayers—up and running.9 In so doing, 

however, management controls had not been given equal attention and thus had not 

kept pace. This emphasis on new systems added significant cost, schedule, and performance risks that escalate as a program advances. Moreover, these risks increased 

as IRS moved forward because of interdependencies among projects, and the complexity of associated workload activities to be performed increased dramatically as 

more systems projects were built and deployed. 

In addition, we identified other deficiencies in the BSM program, including the 

need to establish processes that meet the level 2 requirements of the SEI’s Software 

Acquisition Capability Maturity ModelTM,10 and to improve modernization management controls and capabilities, such as those related to configuration management, 

risk management, enterprise architecture implementation, human capital strategic 

management, integrated program scheduling, and cost and schedule estimating. 

In response to our recommendations, IRS has made important progress. First, significant progress has been made in establishing the modernization management 

controls needed to effectively acquire and implement information technology systems. For example, IRS has 

• invested incrementally in its modernization projects; • defined a systems life cycle management methodology, which IRS refers to as 

the Enterprise Life Cycle; • developed and is using a modernization blueprint, commonly called an enterprise architecture, to guide and constrain its modernization projects; and • established processes that meet the level 2 requirements of the SEI’s Software 

Acquisition Capability Maturity ModelTM. 

Second, IRS has made progress in establishing the infrastructure systems on 

which future business applications will run. For example, IRS has delivered elements of the Security and Technology Infrastructure Release to provide the hardware, software, and security solutions for modernization projects. IRS has also built 

an enterprise integration and test environment that provides the environment and 

tools for multiple vendors associated with a release to perform integration and testing activities. 

Third, it has delivered certain business applications that are producing benefits 

today. These applications include 

• Customer Communications 2001, to improve telephone call management, call 

routing, and customer self-service applications; • Customer Relationship Management Examination, to provide off-the-shelf software to IRS revenue agents to allow them to accurately compute complex corporate transactions; and • Internet Refund/Fact of Filing, to improve customer self-service by providing to 

taxpayers via the Internet instant refund status information and instructions 

for resolving refund problems. 

46 

11 U.S. General Accounting Office, Business Systems Modernization: IRS Has Made Significant Progress in Improving Its Management Controls, but Risks Remain, GAO–03–768 (Washington, D.C.: June 27, 2003) 12 Initial operation refers to the point at which a project is authorized to begin enterprisewide 

deployment. 13Full deployment refers to the point at which enterprisewide deployment has been completed 

and a project is transitioned to operations and support. 

Fourth, IRS took steps to align the pace of the program with the maturity of IRS’s 

controls and management capacity, including reassessing its portfolio of planned 

projects. 

Nevertheless, IRS continued to face challenges to fully develop and implement its 

modernization management capacity. Last June we reported that IRS had not yet 

fully implemented a strategic approach to ensuring that it has sufficient human capital resources for implementing BSM, nor had it fully implemented management 

controls in such areas as configuration management, estimating costs and schedules, 

and employing performance-based contracting methods.11 We made several recommendations to address those issues. Our analysis has shown that weak management controls contributed directly to the cost, schedule, and/or performance shortfalls experienced by most projects. Given that the tasks associated with those 

projects that are moving beyond design and into development are by their nature 

more complex and risky and that IRS’s fiscal year 2004 BSM expenditure plan supports progress toward the later phases of key projects and continued development 

of other projects, systems modernization projects likely will encounter additional 

cost and schedule shortfalls. IRS will need to continue to assess the balance between 

the pace of the program and the agency’s ability to manage it. 

Projects Continue to Incur Cost Increases and Schedule Delays 

Based on IRS’s expenditure plans, BSM projects have consistently cost more and 

taken longer to complete than originally estimated. Table 1 shows the life cycle variance in cost and schedule estimates for completed and ongoing BSM projects. These 

variances are based on a comparison of IRS’s initial and revised cost and schedule 

estimates to complete initial operation 12 or full deployment 13 of the projects. 

47 

Table 1: IRS BSM Project Cost/Schedule Variance Summary 

Project 

Cost variance (in 

thousands) 

Reported/ 

revised estimated 

cost (in 

thousands) 

Schedule variance (in 

months) 

Reported/revised estimated completion 

date 

Completed Projects 

Security and Technology Infrastructure 

Release 1 +$7,553 $41,287 +5 1/31/02 

(initial operation) 

Customer Communications 2001 +5,310 46,420 +9 2/26/02 

(full deployment) 

Customer Relationship Management 

Exam ¥1,938 7,375 +3 9/30/02 

(full deployment) 

Human Resources Connect Release 1 +200 10,200 0 12/31/02 

(initial operation) 

Internet Refund/Fact of Filing +12,923 26,432 +14 9/26/03 

(full deployment) 

Ongoing Projects a

Modernized e-File Release 1 +17,057 46,303 +4.5 3/31/04 

(initial operation) 

e-Services +86,236 130,281 +18 4/30/05 

(full deployment) 

CADE Release 1 +36,760 97,905 +30b 6/30/05 b

(full deployment) 

Integrated Financial System Release 1 +53,916 153,786 TBD b TBD b

(full deployment) 

Custodial Accounting Project Release 1 +72,058 119,219 TBD b TBD b

(full deployment) 

Customer Account Management Release 

1 TBD c TBD c TBD c TBD c

Source: GAO analysis of data contained in IRS’s BSM expenditure plans. 

aProjects ongoing as of 9/30/03. 

bProject schedules for CADE, the Integrated Financial System, and the Custodial Accounting Project are 

currently under review. cTo be determined. Work on the Customer Account Management project was suspended following the completion of preliminary design activities. No further work is planned until at least fiscal year 2005. 

As the table indicates, the cost and schedule estimates for full deployment of the 

e-Services project have increased by just over $86 million and 18 months, respectively. In addition, the estimated cost for the full deployment of CADE release 1 has 

increased by almost $37 million, and project completion has been delayed by 30 

months. In addition to the modernization management control deficiencies discussed 

above, our work has shown that the increases and delays were caused, in part, by 

• inadequate definitions of systems requirements. As a result, additional requirements have been incorporated into ongoing projects. 

• increases in project scope. For example, the e-Services project has changed significantly since the original design. The scope was broadened by IRS to provide 

additional benefits to internal and external customers. 

• cost and schedule estimating deficiencies. IRS has lacked the capability to effectively develop reliable cost and schedule estimates. 

• underestimating project complexity. This factor has contributed directly to the 

significant delays in the CADE release 1 schedule. 

• competing demands of projects for test facilities. Testing infrastructure capacity 

is insufficient to accommodate multiple projects when testing schedules overlap. 

48 

• project interdependencies. Delays with one project have had a cascading effect 

and have caused delays in related projects. 

These schedule delays and cost overruns impair IRS’s ability to make appropriate 

decisions about investing in new projects, delay delivery of benefits to taxpayers, 

and postpone resolution of material weaknesses affecting other program areas. 

Producing reliable estimates of expected costs and schedules is essential to determining a project’s cost-effectiveness. In addition, it is critical for budgeting, management, and oversight. Without this information, the likelihood of poor investment decisions is increased. 

Schedule slippages delay the provision of modernized systems’ direct benefits to 

the public. For example, slippages in CADE will delay IRS’s ability to provide faster 

refunds and respond to taxpayer inquiries on a timely basis. 

Delays in the delivery of modernized systems also affect the remediation of material internal management weaknesses. For example, IRS has reported a material 

weakness associated with the design of the master files. CADE is to build the modernized database foundation that will replace the master files. Continuing schedule 

delays will place resolution of this material weakness further out into the future. 

In addition, the Custodial Accounting Project is intended to address a financial material weakness and permit the tracking from submission to disbursement of all revenues received from individual taxpayers. This release has yet to be implemented, 

and a revised schedule has not yet been determined. Finally, the Integrated Financial System is intended to address financial management weaknesses. When IRS 

submitted its fiscal year 2003 BSM expenditure plan, release 1 of the Integrated Financial System was scheduled for delivery on October 1, 2003. However, it has yet 

to be implemented, and additional cost increases are expected. 

Internal and Independent Assessments of BSM Have Identified Significant 

Weaknesses and Risks 

Given the continued cost overruns and schedule delays experienced by these BSM 

projects, IRS and CSC launched internal and independent assessments during 2003 

of the health of BSM as whole, as well as CADE. Table 2 describes these assessments. 

Table 2: BSM Assessments Undertaken During 2003 

Subject Organization conducting assessment Purpose 

Root cause analysis IRS To review data from historical documents andinterviews to determine 

root causes for schedule delays and 

cost increases 

PRIME review Bain and Company To identify root causes of breakdown 

in CSC’sbusiness processes and engagement model and provide recommended solutions 

IRS Office of Procurement 

Assessment 

Acquisition Solutions, 

Inc. 

To assess the efficiency and effectiveness of the IRSprocurement organization structure, employment of 

best practices, managementand administration, staffing, and to briefly 

review BSM contracting 

CADE assessment SEI To provide an independent technical 

assessment ofCADE program history and the feasibility of future 

plans 

Source: IRS 

The IRS root cause analysis, PRIME review, and the Office of Procurement assessment revealed several significant weaknesses that have driven project cost overruns and schedule delays, and also provided a number of actionable recommendations for IRS and CSC to address the identified weaknesses and reduce the risk to 

BSM. Deficiencies identified are consistent with our prior findings and include 

• poorly defined requirements, • low program productivity levels, 

49 

14 A business rules engine translates business rules, or processing criteria (e.g., income tax 

refunds of $x or more are held for administrative review), into executable computer code which 

processes transactions related to a tax form, and selects and executes correct rules based on the 

tax year and tax form. 15 Business rules harvesting refers to the process of extracting, defining, and documenting tax 

processing criteria from a variety of sources, including IRS subject matter experts, legacy system 

source code, the tax code, and various other paper documents. 

• project scope creep, 

• IRS/PRIME role confusion, 

• immature management processes, 

• ineffective integration across IRS, and 

• insufficient applications and technology engineering. 

As noted, CADE release 1 has experienced significant reported cost overruns and 

schedule delays throughout its life cycle, and has yet to be delivered. SEI’s independent technical assessment of CADE pointed to four primary factors that have 

caused the project to get off track and resulted in such severe cost and schedule impairments: (1) the complexity of CADE release 1 was not fully understood; (2) the 

initial business rules engine effort stalled; (3) both IRS and PRIME technical and 

program management were ineffective in key areas, including significant breakdowns in developing and managing CADE requirements; and (4) the initially contentious relationship between IRS and PRIME hindered communications. SEI also 

warned that CADE runs the risk of further trouble with later releases due to unexplored/unknown requirements; security and privacy issues that have not been properly evaluated (e.g., online transactions are different from the way IRS does business today); dependence on an unproven business rules engine 14 software product; 

and the critical, expensive, and lengthy business rules harvesting 15 effort that has 

not yet been started. SEI offered several recommendations to address current CADE 

issues and reduce project risk in the future. 

IRS Is Acting to Resolve Issues Identified in the BSM Assessments 

Based on these assessments, IRS identified a total of 46 specific issues for resolution in the following six areas, and developed a BSM action plan comprising individual action plans to address each issue: 

• Organization and Roles. Immediate steps are needed to clarify IRS/PRIME roles 

and responsibilities and clearly define decision-making authorities. 

• Key Skills & Strengthening the Team. Strengthened skills and capabilities are 

needed in such key areas as project management and systems engineering. 

• Technology—Architecture & Engineering. More focus is needed to improve current systems architecture integration. 

• Technology—Software Development Productivity & Quality. Improvements in 

product quality and productivity are essential to strengthening software delivery performance. 

• Acquisition. Contracting and procurement practices require major streamlining 

to improve overall contract management. 

• CADE. Delivery of CADE release 1 will require aggressive focus and attention, 

and a business rules engine solution requires additional evaluation. 

These 46 issue action plans were assigned completion dates and an IRS or PRIME 

owner was assigned to take the lead in implementing each plan. IRS and PRIME 

each also assigned a senior-level executive to drive the execution of the issue action 

plans, identify and help mitigate implementation hindrances or roadblocks, and ensure successful completion of all planned actions. To assess the efficacy of the BSM 

action plan, MITRE was tasked with conducting an independent analysis and provided feedback to IRS on the effectiveness of the specific issue action plans to address the associated findings/recommendations and correct any problems found. 

IRS has reported making steady progress with implementing the BSM action 

plan. According to the IRS BSM program office, as of late January 2004, 27 of the 

46 issue action plans have been completed. Examples of completed actions include 

(1) making business owners and program directors accountable for project success; 

(2) assigning teams to investigate and resolve problem areas on key projects such 

as CADE, the Integrated Financial System, and e-Services; (3) aligning critical engineering talent to the most critical projects; (4) increasing the frequency of CADE 

program reviews; and (5) issuing a firm fixed-price contracting policy. 

Significant further work remains to complete implementation of the remaining 19 

open issue action tasks. Bain & Company—which conducted the independent review 

of PRIME—has been hired to facilitate the implementation of various issue action 

50 

16 IRS Oversight Board Special Report, Independent Analysis of IRS Business Systems Modernization, December 2003. 

plans within the Organization and Roles challenge area, while IRS has also contracted with SEI to conduct further periodic reviews of the CADE project. 

Additionally, the IRS Oversight Board recently issued a report 16 on its own independent analysis of the BSM program, which made several observations and recommendations that are consistent with those discussed here. IRS has conducted an 

analysis of this report to reconcile the board’s recommendations with those that are 

currently being addressed in the BSM action plan. As a result, IRS plans to open 

two additional issues and action plans to address (1) rationalizing and streamlining 

oversight of the BSM program, and(2) determining and maintaining a manageable 

portfolio of projects. IRS expects to complete the majority of the BSM action plan 

by end of April of this year, and fully implement any remaining open actions by the 

end of the calendar year. 

Further, during 2003, the Treasury Inspector General for Tax Administration performed several reviews related to management of the BSM program and for specific 

BSM projects. These reviews identified several issues, including those related to 

compliance with the defined management and project development processes, full 

implementation of disciplined project testing processes and procedures, IRS’s cost 

and schedule estimation process, and contract management. IRS management reaffirmed their commitment to fully implement key management and project development processes. 

Concluding Observations 

IRS’s multibillion-dollar BSM program is critical to agency’s successful transformation of its manual, paper-intensive business operations and fulfilling its restructuring activities. The agency has made important progress in establishing longoverdue modernization management capabilities and in acquiring foundational system infrastructure and some applications that have benefited the agency and the 

public. However, our reviews, those of the Treasury inspector general, and the recently completed internal and independent assessments of the BSM program clearly 

demonstrate that significant challenges and serious risks remain. IRS acknowledges 

this and is acting to address them. 

To successfully address these challenges and risks and to modernize its systems, 

IRS needs to continue to strengthen BSM program management by continuing efforts to 

• balance the scope and pace of the program with the agency’s capacity to handle 

the workload, and 

• institutionalize the management processes and controls necessary to resolve the 

deficiencies identified by the reviews and assessments. 

Commitment of appropriate resources and top management attention are critical 

to resolving the identified deficiencies. In addition, continuing oversight by the Congress, OMB, and others, as well as ongoing independent assessments of the program, can assist IRS in strengthening the BSM program. 

Meeting these challenges and improving performance are essential if IRS and the 

PRIME contractor are to successfully deliver the BSM program and ensure that 

BSM does not suffer the same fate as previous IRS modernization efforts. 

Mr. Chairman, this concludes my statement. I would be pleased to respond to any 

questions that you or other members of the subcommittee may have at this time. 

f 

Chairman HOUGHTON. Thank you very much. Well, Mr. Cofoni, 

you are on the hot seat. 

Mr. COFONI. Yes, I am, sir. 

[Laughter.] 

Chairman HOUGHTON. Delighted to have you here. 

Mr. COFONI. Thank you. 

Chairman HOUGHTON. Please give your testimony. 

51 

STATEMENT OF PAUL COFONI, PRESIDENT FEDERAL SECTOR, 

AND CORPORATE VICE PRESIDENT, COMPUTER SCIENCES 

CORPORATION, EL SEGUNDO, CALIFORNIA 

Mr. COFONI. Mr. Chairman, Mr. Pomeroy, Mr. Portman, I welcome this opportunity to testify today. I am Paul Cofoni, President 

of the Federal Sector and Corporate Vice President of CSC. 

Since December 1998, we have led the PRIME Alliance for the 

IRS. The PRIME Alliance includes some of the best names in the 

technology and business modernization world, SAIC, IBM, Unisys, 

Northrop-Grumman, and BearingPoint. In addition to our alliance 

partners, there are about 809 small business subcontractors performing work on the program, all of which, by the way, are doing 

that work in this country and principally in Maryland and New 

Carrollton, across the street from the IRS large building complex. 

While there have been difficulties with the BSM program, in 

partnership with the IRS, we have created, in fact, a strong program with a sound architecture and a technology foundation for future success. The IRS’s past difficulties in modernizing its technology are well documented. Past attempts lacked the central vision and architecture, and most of all, failed to achieve business objectives that would benefit taxpayers or provide significant efficiencies to the government. 

In 1998, after 2 years of competitive bidding, the IRS awarded 

the CSC PRIME Alliance team a contract for up to 15 years with 

an original estimated value of up to $7 billion. Under the contract, 

work is identified by task order and separately procured, competitively separately procured. 

Through December 2003, Congress has appropriated approxi- mately $1.35 billion, and the IRS has funded CSC for approximately $927 million of that $1.35 billion. That has been done 

through 114 task orders and approximately 1,100 task order modifications. 

Since beginning the program, the PRIME Alliance and the IRS 

have delivered key program and technology foundational elements 

and business applications for the BSM program. These include an 

enterprise architecture and transition strategy that has been 

awarded best in class this past year within government; an enterprise life cycle process tailored to the IRS’s specific needs that creates a methodology for implementing the enterprise architecture; 

and a software acquisition model that has been evaluated by Carnegie Mellon’s SEI at Level 3. I would add, CSC is the first company in the world to receive Level 3 accreditation for software acquisition. We also assisted the IRS in achieving a Level 2, and the 

IRS is the first civilian agency to receive this accreditation. 

We delivered a secure technology infrastructure that allows citizens and tax professionals to interact with the IRS in real time and 

to conduct day-to-day business and solve tax problems on the Internet. The infrastructure is in place today. It is stable, it is secure, 

and it will serve as the cornerstone for successful deliveries of improved services in the future. 

An enterprise management system was also delivered that allows 

IRS information technology professionals the ability to monitor this 

new infrastructure in real time and make corrections or preempt 

problems in real time. 

52 

We also implemented a bilingual customer communication technology upgrade which doubles the capacity of the IRS’s ability to 

handle telephone calls at its call centers. It reduces wait times and 

helps taxpayers who are seeking assistance, as the Commissioner 

pointed out in his testimony. 

We implemented the Internet Refund Fact of Filing, or ‘‘Where 

is my refund?’’ web-based application which provides taxpayers instantaneous status of a refund versus driving a large volume of inquiries into the phone system, causing delay and frustration for 

taxpayers. I would add here that the IRS website in the last week 

in July was 1 of the top 10 websites in terms of popularity or hits, 

and it was primarily this application that did that. 

Added to this application in a very short 2-month period was the 

Advanced Child Tax Credit Initiative, which allows taxpayers to 

ascertain whether their tax credit is available to them. Taken together, these two applications since implementation have avoided 

over 24 million taxpayers from having to make a call to the IRS 

call center. 

We implemented a laptop software tool that allows IRS agents to 

use modernized and sophisticated technology for the first time to 

do their work. This has resulted in faster resolution of cases and 

consistent treatment across all business taxpayers. 

We implemented the Internet Employer Identification Number. 

This allowed over 450,000 applications to be processed over the 

Internet for new small business owners. As the Commissioner 

pointed out, we implemented seven e-services, web-based applications that have allowed 55,000 applications for Tax Identification 

Numbers (TIN) by tax preparers, 40,000 electronic return originators, 40,000 of them to register with the IRS, and in the first 24- 

hour period of an application for bulk TIN matching, over 425,000 

transactions were completed. 

This being said, there is more to do. We have near-term deliveries. The IFS, we have talked about here. We were enormously 

disappointed that we had to miss our commitment which we made 

to the Commissioner. We promised April and we will not be able 

to do that. The reason is that during final testing of this application, we encountered data conditions that were unknown to ourselves and to the IRS in the legacy systems. This makes—these 

data conditions, which had not been defined in our requirements or 

in the system design, require us to go back and do redesign and 

rebuild and retest the system, which will delay implementation 

until the end of the government fiscal year. 

While I am not satisfied with having to delay IFS, we understand what caused these problems and we understand what we 

need to do to prevent them going forward. Additionally, I would 

add that CSC has stepped forward and offered to incur all the additional costs between April and October for IFS. 

Modernized e-file is a contract that is outside of our PRIME contract but for which we do have responsibility for integrating that 

application onto the secure infrastructure and CADE Release 1. 

This is the all-important first step toward replacing the master file. 

We have had great recent progress and recently we have passed 

system integration testing, IRS user acceptance testing, and we 

have conducted a pilot for the 1040EZ release. We have added 2003 

53 

tax law changes to that system. Those changes are now undergoing 

testing, and we are planning any necessary 2004 changes so that 

we will be ready for the 2005 filing system to do a complete processing of 1040EZ. 

Notwithstanding these accomplishments and imminent accomplishments and progress, we are not satisfied with our performance 

nor that of our alliance partners. Together with the Commissioner, 

we conducted several studies, as has been mentioned. One of those 

studies we commissioned ourselves and we asked Bain and Co. to 

perform that study to look at where we are having difficulties, and 

here is what Bain concluded. 

First, that the IRS and CSC need to improve significantly the 

business requirements definition process. As the Commissioner 

pointed out, we can no longer allow new business requirements to 

be identified during the testing phases of a project. They must be 

identified at the front end of a project. 

Second, both parties need to streamline the decisionmaking process. We must have a single source of decision making throughout 

the program. Consensus decisionmaking among many is not feasible for a program of this complexity. 

Third, there must be an increased focus on business transformation, more business representation on project teams, and an 

increased role by the business in the requirements definition process and transition planning. 

Last, we need to improve the accountability for ourselves and our 

PRIME Alliance partners. We have to hold ourselves accountable 

for our performance, and we do. 

The CSC from the very top of our organization is committed to 

program success, and we will do whatever it takes to deliver. The 

SEI study stated, ‘‘Stay the course.’’ I cannot agree more. While 

challenges lie ahead, I know the CSC team in place today can face 

those challenges. The IRS and CSC must leverage our past lessons 

learned and take advantage of our successes to improve the overall 

delivery, performance, and eliminate on-time, on-budget issues that 

persist. 

The goal of CSC as the integrator for this important program is 

to deliver the best tax administration system to the American taxpayers. I am personally committed to achieve this goal in partnership with the IRS, Congress, and the various stakeholders. Thank 

you. 

[The prepared statement of Mr. Cofoni follows:] 

Statement of Paul Cofoni, President Federal Sector, and Corporate Vice 

President, Computer Sciences Corporation, El Segundo, California 

Mr. Chairman, thank you for this opportunity to testify before the Ways and 

Means Subcommittee on Oversight. Over the past few years, the management and 

employees of Computer Science Corporation have appreciated the opportunity to 

work with the members of this committee and your staffs to advance the effort to 

modernize the Internal Revenue Service. 

I am Paul Cofoni, President Federal Sector, and Corporate Vice President for 

Computer Sciences Corporation(CSC) headquartered in El Segundo, California. With 

approximately92,000 employees worldwide, CSC is a world leader in helping our clients, both government and large business, use information technologies to achieve 

business objectives. These services include systems integration, consulting, and 

change management. 

I am here today to provide you a status of the Business Systems Modernization 

Program at the Internal Revenue Service. Since December of 1998, we have led the 

54 

PRIME Alliance for the Internal Revenue Service. The PRIME Alliance includes 

some of the best names in the technology and business modernization world: SAIC, 

IBM, Unisys, Northrop-Grumman and BearingPoint. While there have been some 

difficulties with Business Systems Modernization or BSM as it is referred to, the 

PRIME Alliance, in partnership with the IRS, have created a strong program, architecture, and technology foundation for future success. But, before I talk about both 

the successes and difficulties at the program, I would like to touch briefly on the 

history of how we got to where we are today. 

Past Attempts at Modernization—The IRS originally developed its database 

systems in the late 1950s and 1960s to capture, store, and process tax return and 

payment information. These systems, known as the ‘‘Master Files’’, were developed 

largely on mainframe platforms that provided the requisite performance, capacity, 

and security. At the time, the IRS computer system was widely viewed as leading 

the world in the automation of tax collection. As the volume of data mushroomed 

over the succeeding decades and as federal statutes evolved concerning the privacy 

and nondisclosure of confidential taxpayer information, the IRS experienced greater 

difficulty in managing the data. The difficulty has intensified with the increased demand for online data to resolve taxpayer account issues, facilitate examination and 

collection, as well as provide for improved taxpayer service. 

Two attempts to modernize the IRS technology base failed. During the 1970s, the 

IRS, limited by funding constraints, was only able to replace worn out computers. 

Because of the underlying architecture was so antiquated, it limited the IRS’s ability to access taxpayer account information. To overcome this shortcoming and to 

augment the delivery of taxpayer services and compliance functionality, the IRS developed stand-alone ‘‘stovepipe’’ systems with separate databases. While these systems provided some access to limited taxpayer account information, as the system 

evolved and more demands were made, the IRS experienced increasing difficulties 

synchronizing disparate stand-alone systems and databases. The IRS computing environment evolved into an extraordinarily complex array of legacy and stand-alone 

systems with respect to both connectivity and interoperability between the mainframe platforms and the plethora of distributed systems. Additionally, maintenance 

and annual updating of tax changes became increasingly more expensive and risky. 

In 1983, Congress approved a comprehensive technology improvement plan, called 

Tax Systems Redesign (TSR). IRS haste to introduce new technology for the 1985 

tax season was in large measure responsible for the first-ever filing season failure 

at a cost of $15.5M in interest on delayed refunds. In response, Congress approved 

a sweeping Tax System Modernization (TSM) program that was projected to cost 

$4B and was slated to be operational by 2000. The Treasury Department dismantled 

TSM in 1996 after repeated reviews by GAO and this committee pointed out that 

the program was not delivering any significant business and processing improvements. 

The PRIME Contract—The 1998 Restructuring and Reform Act mandated that 

the IRS focus on serving the public and meeting taxpayer needs and paved the way 

for Business Systems Modernization (BSM). BSM is one of the largest civilian technology renovation programs ever to be undertaken. This modernization effort involves massive, long-term change for all IRS organizations and for taxpayers. 

Shortly after passage of the Restructuring Act and after almost two years of competition, the IRS awarded the CSC PRIME Alliance team the Prime Systems Integration Services Contract (IRS PRIME) in December 1998. It is a 15-year, $5B to 

$7B, Indefinite Deliver, Indefinite Quantity (IDIQ) contract, where work to be performed is identified by task order and separately procured. Through December 2003, 

Congress has appropriated approximately $1.35B for the BSM program. Of the 

$1.35B, the IRS has funded CSC for approximately $927M through 114 task orders 

and 1100 task order modifications. 

CSC, in its role as the prime integrator (The PRIME) for Modernization: 

• Provides program management, technical, and process infrastructure necessary 

to acquire and integrate business solutions into the evolving IRS operational environment; 

• Assumes lead responsibility for maintaining the architecture and standards for 

Modernization, validating business requirements, reengineering business processes, preparing business cases, and developing alternative engineering solutions; 

• Acquires, integrates, tests and deploys modernized systems together with organizational change activities, business user training and other support functions; 

• Competitively selects best-value technology solutions that are derived from commercial best practices and custom-off-the shelf (COTS) products developed by 

our PRIME Alliance partners and other contractors; 

55 

• Uses its established commercial methodologies and best practices (CatalystSM) 

and those of our partners to manage the contract and modernization efforts; 

and 

• Also may provide post-production systems operation and maintenance (O&M) 

support to enable the IRS to leverage PRIME’s expertise and procurement flexibility with the aim of enhancing the post-production Modernized environment. 

Business Systems Modernization Account—To manage funding for modernization, Congress established the Business System Modernization Account and 

created several strong pre-conditions for the release of funds from the account. IRS 

was and continues to be required to undertake the following: 

• Create and continuously implement an Enterprise Architecture (EA) that is an 

institutional blueprint defining how the IRS operates today, in both business 

and technology terms, and how it wants to operate in the future; 

• Develop and follow a lifecycle management program; 

• Acquire the services of a prime contractor to lead the system integration effort; 

and 

• Submit to frequent, in-depth audits and reviews by the GAO, the Treasury Inspector General for Tax Administration (TIGTA), and the Office of Management 

and Budget (OMB). 

As a consequence, unlike past efforts, every dollar expended under the BSM program must undergo one of the toughest oversight and compliance process in the 

Federal Government. These include stringent business case development, compliance with the program architecture, and the meeting of specific and defined milestones for each module of the overall program, before additional funds can be released from the account. While at times a burdensome and time-consuming process, 

it is the government’s insurance policy that its investment will be spent wisely on 

technology solutions that deliver value to both the government and the American 

taxpayer. 

Significant Accomplishments—As stated earlier, the PRIME Alliance and the 

IRS have delivered key program and technology foundational elements for the BSM 

program. Additionally, a number of business applications have provided significant 

business value to IRS employees and more importantly, the American taxpayer. I 

want to take a moment to summarize the joint accomplishments of the PRIME Alliance and the IRS since the inception of the program. Let me begin with the program 

foundational successes. 

Enterprise Architecture/Transition Strategy. Building on the IRS-developed Blueprint for Technology Modernization, published in May 1997, CSC and the IRS jointly 

developed the Enterprise Architecture (EA)in January 2001. The EA is a business 

and technology blueprint that defines both the IRS future state and the approach 

to achieving it. This joint effort by CSC and the IRS has resulted in recent recognition. The EA received the Excellence in Architecture Award from the E–Gov, FCW 

Media Group and Federal Enterprise Architecture Certification Institute on 14 September 2003. Its companion document, the Enterprise Transition Strategy (ETS) 

provides the roadmap and schedule for implementing the components defined in the 

EA. The ETS is updated yearly in response to changing priorities and budgetary 

constraints, and provides CSC and the IRS with critical information for use in making business investment decisions. 

Enterprise Lifecycle Process. A key foundation element for program success is the 

creation of a methodology, tailored to the environment and needs of the IRS, for implementing the EA. Using our own proprietary methodology, CatalystSM, as the 

foundation, we worked with the IRS to create the Enterprise Lifecycle (ELC), an approach that integrates business and technical change in the IRS and is responsive 

to the IRS effort to simultaneously change its business enterprise and its IT systems. The ELC is mandated for all modernization projects. 

Software Acquisition Capability Maturity Model. CSC adopted the Software Engineering Institute’s (SEI)Software Acquisition Capability Maturity Model (SA CMM) 

as a program management model. Following deployment and internal benchmarking, CSC became the first organization in the world to be evaluated at Level 3 of 

the SA CMM. Leveraging this success, CSC assisted the IRS in preparing for its 

SA CMM evaluation. In December 2002, the IRS was evaluated at a Level 2, the 

first Federal civilian agency to achieve this level. All PRIME Alliance partners are 

required to be rated at Level 3 or higher of the SEI Software Development (SW) 

CMM. 

Security and Technology Infrastructure. In May 2002, CSC deployed the Security 

and Technology Infrastructure Release (STIR) that provides a common, modernized 

IT infrastructure for secure interaction between employees, tax practitioners, and 

56 

taxpayers. With the need for an extraordinarily high level of security to protect the 

integrity of financial and taxpayer information, deploying modernized applications 

today and in the future is not possible without the STIR in place. This hugely complex firewall will enable the IRS to fulfill the congressional vision of ‘‘a customer 

focused IRS,’’ that can provide taxpayers with many self-help, Internet based options for dealing with a complicated tax system, while at the same time providing 

the highest level of security of confidential taxpayer information. 

Enterprise Systems Management. Additionally, the PRIME has delivered a modern 

tool to assist the IRS in managing the health and security of the entire technology 

system. Enterprise Systems Management (ESM)capabilities provide an around-theclock systems monitoring to the e-Business Modernization applications. The ESM 

foundation was laid for a centralized enterprise-wide management system that will 

identify in real time lapses in systems performance enabling the IRS to act immediately to provide high-availability of critical IRS taxpayer applications. 

Let me now turn to the business solutions that have been implemented over the 

last three years that have provided real business value to the IRS and to taxpayers 

and third parties who interact with the IRS by telephone or through the Internet. 

These solutions not only provide improved services levels to taxpayers as desired by 

Congress but the solutions in place today can be leveraged in the future to continuously provide improvements to service levels faster and less costly. A clear example 

of how one application was leveraged to implement a program quickly and less costly was the Advanced Child Tax Credit legislation passed by Congress last summer. 

I will touch on this successful implementation later in my remarks. 

Customer Communications 2001. This project improved the IRS’ telephony architecture by implementing intelligent call routing technologies. CC01 increased the 

number of taxpayers serviced through efficient call routing and shorter wait times 

to reach the appropriate customer service representatives (CSRs). CC01 also implemented voice recognition for English and Spanish callers and delivered telephony 

improvements that nearly double the capacity at the 25 IRS Call Centers from 800 

to 1500 calls per hour. This improved capacity allowed the IRS to handle 46 million 

calls in four months during the 2003 tax-filing season. Approximately 84 million 

calls were routed in fiscal year 2003. Today, the IRS is experiencing a 50 percent 

reduction in abandoned calls and wait time and the number of Spanish calls has 

doubled. 

Internet Refund Fact of Filing. In 2002, we expanded the IRS’s customer communications capability when we deployed Internet Refund Fact of Filing, (IRFOF), a 

Web-based application that allows all taxpayers online access to account information 

and the ability to track the progress of their tax returns, including refunds. Performance of IRFOF has far surpassed original expectations. Two million hits per 

year were projected; IRFOF handled more than 15 million requests in its first taxfiling season, and 17.9 million requests in 2003. 32% of all refund inquires came 

through the IRFOF Web page. As I stated earlier as an example of how current applications can be leveraged, in July 2003, we leveraged the IRFOF application by 

implementing the Advance Child Tax Credit (ACTC) application. Built in 2.5 

months, ACTC provided online access to tax creditpayment status to about 26 million taxpayers and about 15.5 million inquiries have been received to date. This is 

a success story that received media attention on August 8, 2003 in Government 

Computer News. The Headline read . . . Taxpayers rushing to IRS.gov . . . Let 

me quote from the article because I really believe the article best describest the 

business value of the solutions that CSC is delivering to the IRS and taxpayers. 

One of the most popular Web sites last week was not a sports or entertainment 

site, but—www.irs.gov. Eager taxpayers trying to determine how much and when 

they would receive their child tax credit checks swamped the site. The spike in 

traffic made the IRS one of the top 10 Internet sites for the week ending July 

27, said Max Heineman, a spokesman for Internet traffic researcher Nielsen/ 

NetRatings. 

. . . About 9 million visitors used the IRS’ ‘‘Where’s my advance child tax credit’’ 

feature between July 14, when it went live, through yesterday, said IRS spokesman Tim Harms. ‘‘It’s as successful as the ‘Where’s my refund’ feature was last 

filing season,’’ he said 

Customer Relationship Management Exam. This project modernized policies, processes, and technology to enable faster case resolution and higher customer satisfaction. CRM Exam deployed an off-the-shelf case management and resolution tool, Bureau of National Affairs (BNA) Corporate Tax Audit Analyzer (CTAA). CRM Exam 

allows for highly complex tax computation automatically, thus increasing confidence 

in revenue agents’ data, while reducing exam time. The average time spent on tax 

computation was reduced from 53 to 17 hours, a 68% reduction. The project team 

57 

trained nearly 4,000 agents in the Large and Mid-Size Business (LMSB) operation 

in use of the application with a training approval rating from agents of 82%. 

Internet Employer Identification Numbers (I–EIN). Deployed in April 2003,this 

project enables employers and tax practitioners to apply for and receive employer 

identification number online quickly and securely, and with less direct involvement 

by the IRS. I–EIN decreases taxpayer burden through 24-hour availability and 

elimination of paper forms. About 453,000 EIN applications have been processed 

since this functionality was implemented. 

e-services. Delivered over the last 7 months, the e-services project offers a suite 

of Internet-based applications providing 7 distinct business capabilities to electronic 

return originators and third party practitioners. These capabilities will answer the 

needs of Electronic Return Originators (EROs) and third parties who interact with 

the IRS almost daily and who have demanded these real time paperless services for 

some time. Here are the new services that are now available. EROs can now register electronically to do business with the IRS as an ERO; they can now submit 

Power of Attorney applications electronically reducing the time to represent their 

clients before the IRS. The Transcript Delivery Service will provide real time electronic delivery of tax return and account information to tax practitioners and other 

third party users such as State and Federal agencies. e-services solutions also address recurring operational issues within the IRS, including lengthy cycle times and 

high percentage of rework, by making it easier for taxpayers and other entities to 

transact business with the IRS and by providing faster responses. Here is an example of how the new e-services functionality will streamline one area of operation of 

the IRS. Currently the IRS receives 1.4 Billion transactions each year with individual names linked to taxpayer identification numbers. Approximately 70 Million 

have errors. e-services will allow submitters to validate the tax ID number before 

submission, dramatically improving data quality. 

Near Term Deliverables—During 2004, the PRIME Alliance and the IRS are 

going to deliver a number of important projects providing significant benefits to taxpayers and to the IRS in improving overall management of the financial area of the 

agency. 

Integrated Financial Systems. When deployed, this project will be a key enabler 

to ensure that the IRS meets all internal and external requirements for management controls, performance measures, and financial reporting. The IFS will correct 

material deficiencies in current financial processes identified by GAO and will help 

the IRS to sustain an unqualified audit opinion on its consolidated financial statements and comply with legislative directives. The IFS provides for a single, integrated source for budget management, core accounting, and cost management data 

and provides a general ledger for custodial and administrative accounting. The IFS 

is based on an industry-standard COTS financial package (SAP) with tailoring (configuring of the package) to address unique Chief Financial Office (CFO) requirements. The initial release, including core financial and budgeting functionality is 

scheduled for delivery before October 2004. 

Modernized e-file. Within the next few months, the IRS will be able to receive corporate tax returns and information returns electronically. This important step will 

help move the IRS closer to the 80 percent goal for electronically filed returns while 

promoting error-free filing and immediate access to return information for use by 

taxpayers and the IRS. While CSC was not the integrator for this project, this solution will run on the infrastructure platform built by CSC and the functionality from 

one of the e-services applications delivered by CSC will became a key component 

of this project. 

Customer Accounts Data Engine—The Customer Account Data Engine 

(CADE) is regarded as the most critical building blocks in the entire BSM program. 

CADE will replace the 35 year-old master file system that contains the authoritative 

record of all taxpayer accounts. The current system is extremely large and in constant use. It requires approximately 13 terabytes of mass storage and during a peak 

week performs 28 million transactions. CADE will replace the existing system with 

new technology, new applications, and new databases to provide IRS employees with 

real-time, electronic access to all aspects of a taxpayer record within mandated requirements for the security and privacy of taxpayer data. Once fully operational, 

taxpayers will see real benefits as well. Today’s system is designed to process return 

data in a weekly cycle; the new system will reduce the cycle time from one week 

to one day, thus allowing faster refunds to taxpayers and also making taxpayer return information available sooner. This will be extremely important as the IRS 

moves closer to a self service strategy for taxpayers, tax practitioners and other 

third parties. 

Where are we today with CADE implementation? That first release of CADE was 

completed in early January 2004, which I consider a major milestone for this proVerDate May 04 2004 07:08 May 21, 2004 Jkt 093604 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HR\OC\A93550.XXX A93550
58 

gram. This milestone represents a lot of hard work and dedication by the joint IRS/ 

CSC PRIME team to make this event a reality. 

Many of you, I know, have read press accounts around the delays in delivering 

CADE. As I have said before, CSC takes full responsibility for its share of the delay 

in completing the first release of CADE. We at CSC did not understand the complexity of the current systems environment; nor did we understand what it would 

take to build a new data base platform for the IRS. But let me say now, however, 

that in my 30 years of working in the technology field, I have never encountered 

any program of the size and complexity as the business systems modernization program at the IRS. 

To put this program in its proper perspective: a 60’s system, largest data base of 

its kind (150 million taxpayers), $2 trillion payments processed annually, about 

250,000 business rules (about 50,000 business rules around the first release of 

CADE), intense security requirements, 60 million phone calls received annually during the filing season, and added complexity of writing software that will allow the 

IRS to operate both systems simultaneously during the transition period. 

Can you think of any organization in the world that would match the size and 

complexity of the IRS? I cannot. 

With the first release of CADE complete, we are now on a path to complete the 

next release by mid 2004 and during the 2005 filing season, the Customer Account 

Data Engine will process the first 1040EZ returns filed by over 6 to 7 million taxpayers. 

Schedule and Budget Problems 

While the program has experienced delivery issues with schedule and cost, I believe that the program is on a path that will demonstrate substantial improvement 

in delivery performance in the near future. Let me tell you why I believe this to 

be true. The top leadership at CSC and the IRS are committed and focused on building a business systems program second to none. Over the last several months, CSC 

and IRS senior executive leadership now meet regularly to discuss program performance. Mike Laphen, our COO and Commissioner Everson meet monthly and those 

meetings have resulted in discussions around the issues that impede progress on the 

program and reaching agreement on the steps needed to continue the momentum 

that the program has experienced. And every two weeks I, along with the CSC General Manager of the Program, Jim Sheaffer, meet with John Dalrymple the Deputy 

Commissioner for Operations Support, Todd Grams, the CIO and Fred Forman, Associate Commissioner, Business Systems Modernization, to discuss project status 

along with other critical issues around the program. Additionally, we have begun 

a process of co-locating CSC and IRS executives to improve communications and to 

create a closer working relationship, characteristics so important to successful implementation of a program of this size and complexity. 

Since July 2003 a number of external studies of the program have been conducted 

at the request of Commissioner Everson and our COO, Mike Laphen. Soon after his 

appointment, Commissioner Everson engaged Carnegie Mellon University, Software 

Engineering Institute (SEI) to perform a ‘‘health check’’ on the proposed use of the 

Sapiens eMerge business rules engine for the CADE project as well as to conduct 

a full Independent Technical Assessment of the CADE program. Such assessments 

are conducted in response to cost, schedule and performance problems. 

Principal findings of the SEI report concluded that the PRIME now has the technical and management talent to deliver the first release of CADE. That finding has 

become a reality as the first release was completed in early January, as I stated 

in my earlier remarks around the CADE project. Another principal finding was that 

the business rules approach executed by CSC PRIME is conceptually sound but that 

the technology needs further evaluation. The evaluation process for business rules 

has already begun. 

To put the accounts of schedule and cost slippages into perspective, I want to take 

a moment to make you aware of a key point made in the SEI report around the 

complexity of the first release of CADE. The report observed that CADE was ‘‘in 

uncharted waters’’ for the IRS/PRIME team. Moreover, the report stated that: 

‘‘Early in the assessment, both the PRIME and the IRS asserted that Release 

1 was the ‘‘simplest of releases—just the 1040EZ . . . the ‘it’s the easy release’ 

public face undermined the ability of stakeholders, including Congress, to grasp 

the complexity of the release, where approximately 85% of the code is CADE 

infrastructure, with the remaining 15% related to the 1040EZ business rules. 

A better approach would have been to publicize Release 1 as the foundation for 

CADE to better set stakeholder expectations.’’ 

59 

I think this independent observation by SEI is an important lesson for both CSC 

and the IRS. The lesson for me is that all of us connected with the program must 

convey the‘‘right’’ message to our stakeholders about the business of modernizing 

the IRS. We obviously have not done that in the case of the CADE project. 

At the same time as the SEI assessment was underway, my COO made the decision to invest in an outside study to evaluate the program with a focus on the significant inhibitors to on-time and on-budget performances, and to make recommendations on what we can do to improve overall delivery performance. Bain and 

Company was selected to perform this analysis. 

Bain and Company identified two primary drivers for the problems around ontime and on-budget performance: loosely defined requirements and under performing execution of the projects. Their review concluded that significant changes 

are needed to successfully deliver business systems modernization to the IRS. First, 

we must improve significantly the business requirements definition process. We can 

no longer wait until a project is in the testing phases of a project to identify a new 

business requirement. Second, both CSC and the IRS must streamline the decisionmaking process and authority. The program needs a single source for decision-making; concenus decision-making among many is not feasible for a program of this 

complexity. Third, both parties must have an increased focus on business transformation, including more business representation on project teams, and an increased role by the business in requirements definition and transition planning. 

Lastly, improvement in subcontractor accountability and delivery is essential for 

success. We must hold our subcontractors accountable for excellent performance. 

In late October 2003, Commissioner Everson and COO Mike Laphen initiated 46 

action plans to address the findings of these studies over a period of six months. 

Senior executives from the IRS and CSC are leading the work around these action 

plans and as of today, work has been completed on almost two-thirds of the actions. 

The IRS Oversight Board issued an independent report in late December and the 

principal recommendations in that report are covered by the joint IRS/CSC action 

plan work. 

Closing Remarks 

In closing, the IRS Modernization Program is at the top of my company’s watch 

list of projects. Our CEO is briefed periodically on the progress we make in modernizing the IRS as well as the challenges we face in delivery performance. COO Mike 

Laphen, Jim Sheaffer, the General Manager, and myself are personally committed 

to program success and we will do what it takes to deliver. One study, SEI, stated, 

‘‘stay the course.’’ I cannot agree more. We have made significant progress over the 

last 6 months. The fact is we have delivered significant business value to our American taxpayers and to the IRS. The infrastructure that we have built is stable and 

secure and will serve as a cornerstone for future successful deliveries of improved 

services. We have created a solid management process foundation, and we have delivered a number of applications that ease the burden of taxpayers and third parties 

who interact with the IRS by telephone and through the Internet. While I know that 

more challenges lie ahead, I also know that the CSC team in place can successfully 

meet those challenges. The IRS and CSC must now leverage our past experiences 

with modernization and continue the commitment to work together in partnership 

and trust (and I cannot emphasize enough the importance of partnership and trust) 

to improve overall delivery performance and to eliminate on-time and on-budget 

issues. The goal of CSC, as the integrator for this important program, is to deliver 

the best tax administration system to the American taxpayers. I am committed to 

achieve this goal in partnership with the IRS and Congress and our various external 

stakeholders. 

Mr. Chairman, I thank you for the opportunity to appear today before you and 

your subcommittee and I will be happy to answer any questions. 

f 

Chairman HOUGHTON. Thank you very much, Mr. Cofoni. I am 

just going to ask a question, and then I will turn it over to you, 

Earl and Rob. 

I thank you very much for your testimony. Let me just direct this 

to you, Mr. Cofoni. You have got a great company, and you have 

done a lot of things right. At the same time, we are responsible for 

people and their money and the investment of the tax dollars. The 

bottom line is that we haven’t met the mark. We can’t manage this. 

60 

We are the distributors of funds to the IRS, but we have got to 

have oversight and confidence that this is going well. 

It seems to me that there is such a difference between your testimony and that of some of the others. Tell me, why is this difference 

there? 

Mr. COFONI. I don’t think there is a fundamental difference. I 

think we are proud of the accomplishments that our people have 

made and our alliance partners have made, and I wanted to make 

sure that we articulated those for you today to make sure you had 

a balanced view. We accept responsibility and accountability for the 

slippages in the case of both CADE and now IFS. By the way, of 

all the five projects that are being discussed, three of those fall 

under my contract, our contract. 

For the two, CADE and IFS, we have stepped up and we have 

taken the responsibility for cost overruns. We did that for CADE 

a year and a half ago and we did that just recently when we announced the IFS overrun. So, we recognize that these are problems, 

we have taken aggressive action based on the studies that have 

been done, and we will continue to take actions to improve. 

There is no escaping the fact that we are not proud of our performance on the program in terms of cost and schedule. We are 

quite proud of the deliveries, the quality of those deliveries, the acceptance within the IRS and by taxpayers of those deliveries. 

Chairman HOUGHTON. I think when a contractor takes on a 

job, it writes its name in blood on this thing. 

Mr. COFONI. That is true. 

Chairman HOUGHTON. This is what we are going to do, and if 

we don’t do it, it is our fault. If we don’t do it, you have got to have 

an interaction between the people who you are working for and you 

have got to anticipate and make tough demands. If this isn’t working, we are going to do this, and if that isn’t right, we can’t do the 

work at all. 

I don’t see that. I see it has been bubbling and bubbling and bubbling along, and all of a sudden, there is disenchantment within 

the system and it is laid on your doorstep and really, in effect, you 

are the fellow that is responsible. 

Mr. COFONI. Yes, sir. I accept that criticism, and we have put 

some new stakes in the ground. We are not going to start new work 

before the requirements are fully defined in detail. That has been 

at the heart of our problems. The core problems underlying these 

overruns have to do with unknown requirements and unknown 

data conditions. There are other contributors, as well. I don’t mean 

to single only those, but those are the core. 

We have rededicated ourselves to not go forward. We will not 

take work if we don’t have requirements defined well in advance. 

We will walk away from that work. 

Chairman HOUGHTON. That is ex post facto. What about a year 

ago? 

Mr. COFONI. I think a year ago, our people were trying to do 

what they believe was in the best interests of the IRS. If we didn’t 

feel we understood all of the requirements, we moved forward in 

any—we moved forward. We moved forward with the feeling that 

we were doing the right thing for the IRS. As it has turned out, 

this was not the right thing. The right thing would have been to 

61 

have stopped work at that point, not be so accommodating, and demand that we had a detailed sense of requirements, that we put 

our absolute best people into the requirements process collectively 

and drove those out. 

I will add, however, even after doing that, these are 40-year-old 

systems. When I ask my people about the documentation, they 

laugh. The documentation is not there on these systems. So, in 

many cases, our requirements, defining the requirements that are 

embedded in the existing systems is like an archaeological dig. We 

have to strengthen our interrogation processes and our research 

processes to get at a great percentage. I think we will always need 

a reserve against those unknown conditions that no one seems to 

have—— 

Chairman HOUGHTON. Rather than laughing, did you point 

this thing out to the people in the system? 

Mr. COFONI. Oh, of course. They take this seriously. This reflects on their personal performance, their careers. They are in 

most cases working 6 and 7 days a week, 60 hours or more, 100 

percent committed to the effort, but we have them in a very difficult—— 

Chairman HOUGHTON. Well, look, we will have a chance to 

kick this around and get the opinions of other people on the panel. 

I would like to ask Mr. Pomeroy to take over here. 

Mr. POMEROY. Mr. Dacey, I think I will ask my first question 

to you. In looking at a table of cost overruns, it appears that the 

magnitude of what we are talking about is cost overruns of $290 

million, a cumulative delay in terms of deadlines blown of 83.5 

months. Now, that is taking specific programs and adding them together, but does that sound about right in terms of what you have 

been able to see with this project? 

Mr. DACEY. Yes. The table in our testimony is two parts, first 

of all, the completed projects, which we talked about earlier today, 

as well as the ongoing projects. It doesn’t count some of the other 

efforts that were taking place in prior years for which those 

projects have been deferred or delayed for the future. 

So, with respect to our table, this does represent the overruns for 

those projects, but again, there are other projects that aren’t on 

this table that have been part of the earlier parts of BSM. 

Mr. POMEROY. So, as bad as this is, if you go back in time just 

a bit, it gets worse? 

Mr. DACEY. Well, there are other costs in there and we haven’t 

analyzed the overruns, but in going through this process, we had 

made recommendations consistently that they needed to balance 

the pace of these projects with their capability to manage them. As 

part—— 

Mr. POMEROY. Thank you. I am sorry, I didn’t mean to cut you 

off, I just have—I want to use my time as well as I can here. 

Mr. Levitan, you have brought a career’s worth of experience in 

consulting, looking at relationships between enterprises and their 

consultants, looking at consultant contributions to major project 

upgrades within enterprises. Based upon the wealth of experience 

you bring to the Oversight Board, how would you describe this particular project, as way off, really horrible, missed the mark a bit? 

Where in the spectrum are we? 

62 

Mr. LEVITAN. First of all, it is a very, very difficult program, 

but that doesn’t make excuses. We have missed the mark significantly. The IRS has missed the mark in managing the program. 

The PRIME contractors have missed the mark both in delivering 

results based on commitments for target dates and costs and also 

in their responsibilities to be a trusted partner and advisor to the 

IRS and help the IRS in an effective way in managing the programs. It has been a significant miss on all accounts. 

Mr. POMEROY. I appreciate that comment. I do think it is important that we underscore the scale of what we are talking about. 

Some of the discussion sounds like an unsatisfactory performance 

review that might be conducted within the norms of business operations, but I believe missing the mark by $290 million, the delays, 

the insufficiency of meeting the deadlines is really of a stunning 

magnitude. If this does not provide some breach in the trusted relationship between contractor and the IRS, I wouldn’t know what 

was. Certainly looking at it from the generalist perspective of a 

Subcommittee on Oversight Member, I am stunned by what I am 

seeing here, and I am deeply alarmed about it. 

Mr. Palmquist, some of your evaluation is that the technical expertise with the contractor wasn’t quite where it needed to be to 

get this job done, if I understand your testimony correctly. 

Mr. PALMQUIST. Yes. We had questions about, say, things like 

the testing process which the Department of Treasury Inspector 

General also had questions with. Frequently, testing was not coordinated, say, between CSC and IBM, where they may both be 

looking at the same defect, both approaching a solution, but not in 

a coordinated fashion. So, they may both, in fact, be correcting the 

same thing, and then those corrections may not sync up later on. 

So, in many cases, it was not coordinated on a technical side. 

Mr. POMEROY. If I understand correctly, in order to make certain that you have got sufficient horsepower in your contract, in 

this case, there is a benchmark that they need to make, a capability maturity model (CMM) certification. Is that correct? Is that 

what this is geared toward? 

Mr. PALMQUIST. We have several CMMs, the software acquisition CMM that Mr. Cofoni spoke about, as well as the software development CMM. The CMM is only part of the solution, to take the 

SEI itself as an example. The SEI has four initiatives—process is 

one of them. The other ones are architecture, security, and performance critical systems. Processes in and of themselves don’t result in a defined product, as I stated in my testimony. Sometimes 

these processes were not backed up by sufficient technical experience or expertise, and that was one of the areas where we found 

some lacking. 

Mr. POMEROY. So, is CMM a process evaluation or does it also 

include personnel and their competence? 

Mr. PALMQUIST. It is an evaluation of processes. 

Mr. POMEROY. Although Mr. Cofoni notes that they are the 

first to obtain the Level 3 certification for processes under the 

CMM, I would note that you just got it last August when under the 

contract you were supposed to have it July 1, 1999, 4 years earlier. 

To this point, Mr. Cofoni, did you receive any financial penalty for 

63 

being 4 years late in having your system certified as required 

under the contract? 

Mr. COFONI. No, sir. 

Mr. POMEROY. I am interested in what is the manner of financial penalties you have received for failing to meet performance, for 

contractual commitments. 

Mr. COFONI. We have, since 18 months ago, some 18 months 

ago, been paying for all of the work being done on CADE. All of 

our costs and our PRIME Alliance partners’ costs have been paid 

for by our company. 

Mr. POMEROY. What have you been compensated in cost overruns under your contractual relationship with IRS, do you know? 

Mr. COFONI. I don’t have that. About four—— 

Mr. POMEROY. It was cost overruns of $290 million, and you 

having the, certainly the lion’s share of the relationship, I would 

expect most of the compensation under the cost overruns has come 

to your firm, correct? 

Mr. COFONI. That is correct for those projects on the list that 

are within the scope of the PRIME contract, which are the ones— 

I don’t have the list in front of me—so the ones that are active 

projects today are e-services, which we just concluded, IFS, and 

CADE. The others, I don’t have the table that you are referring to 

so I am a little disadvantaged, but—— 

Mr. POMEROY. While your people review that, I have got another question that actually you may find more agreeable. You indicate that under this contract, you have discharged 114 task orders and 1,100 task order modifications. Now, are those essentially 

change orders? 

Mr. COFONI. Yes. 

Mr. POMEROY. That you are getting from IRS? 

Mr. COFONI. Yes. 

Mr. POMEROY. The IRS is not represented here, but someone 

looking over this, either Mr. Dacey or any of the other three of you, 

are these change orders driven by legislative changes that Congress keeps passing so that the target keeps moving of what we are 

trying to get the system to do, or is it simply a very, very poorly 

commenced project? 

Mr. LEVITAN. Mr. Pomeroy, let me respond to that. The change 

orders are many different things. Some of them are legislative in 

nature. Others are that the IRS did a poor job in defining their requirements in the beginning and then their processes of controlling 

the change orders was not very effective. They are trying to address that now by the organizational changes that the Commissioner described previously, putting Mr. Dalrymple in charge of 

managing that process. 

Again, many of those change orders, I would say the majority of 

them were initiated by the IRS. Some of them were absolutely necessary. Some should have been caught much earlier. I would say 

that the issue there rests primarily with the IRS, not with the contractor. 

Mr. POMEROY. Is there a broader lesson to be drawn from this? 

As we outsource, we absolutely must retain within the staff structure of the government agency doing the outsourcing sufficient 

64 

technical competence to adequately engage and oversee the contractor? 

Mr. LEVITAN. You are absolutely correct. It is not just technical 

competence. Even more importantly than that, it is the project 

management competence. Quite honestly, the Board has been telling the IRS that its own capabilities to manage the program and 

oversee the contractors has been inadequate. They have been very 

slow to move on that and make the necessary improvements. 

Again, steps are underway at the present time to bring in additional resources to help accomplish that. 

Mr. POMEROY. A final focused question, Mr. Chairman. Thank 

you for your leave here. Mr. Cofoni, you indicate in your testimony 

you have 92,000 employees worldwide. Is this work being done incountry? 

Mr. COFONI. All of the work for the IRS is being done in-country, principally done in Maryland in our New Carrollton facility 

across the street from the IRS facility. 

Mr. POMEROY. Thank you. 

Chairman HOUGHTON. Thank you. Mr. Portman? 

Mr. PORTMAN. Thank you, Mr. Chairman, and thank you, gentlemen, for your testimony this morning. I started off my last comments saying here we are again, and it really is frustrating for all 

of us to once again be in a situation where we are partway through 

a business modernization process, in the case of the important 

work on CADE and important work on the IFS. We were hoping 

to get IFS done early this spring, hoping to get CADE done back 

in year-end 2002, I believe, and yet we are reaching to try to get 

those done this year. So, the question is, how do we keep the momentum going toward a deliverable here, at the same time being 

sure that the problems we have encountered are handled properly. 

The first question I am going to ask is to the entire panel except 

for Mr. Cofoni, which is should we change PRIMEs at this point? 

Are we at the point where, again, despite the fact that at least in 

a couple of these deliverables we are close, we hope, to accomplishment, have we had enough problems here in terms of the cost overruns, in terms of the delays, that we should change the PRIME? 

Mr. Levitan, I will put you on the spot. 

Mr. LEVITAN. Mr. Portman, I am going to have to come back 

at you. The RRA 1998 specifically precluded the Board from getting 

involved in procurement activities. Our legal counsel has told us 

that advising the IRS to fire a contractor would be getting ourselves involved in that. 

We have been very strong in saying that the IRS needs to look 

at all options in strengthening the team to get done what needs to 

get done, and we feel very strongly about that. We are precluded 

from making a recommendation to fire anybody. 

Mr. PORTMAN. I have to respect your inability to get involved 

in procurement, since those of us on this panel were part of establishing that and I think that was appropriate. I am not sure that 

it is fair to say that we didn’t view the Board’s authority to include 

looking at a big picture issue like this and telling us what direction 

we ought to take, so perhaps we could differ on whether this is a 

procurement issue or whether it is a recommendation of the Board 

65 

on a major modernization project, but I won’t put you on the spot 

any further, at least not in public testimony. 

Mr. LEVITAN. Just let me go one step further. I think that looking at this issue is not a black and white issue. 

Mr. PORTMAN. I couldn’t agree more. 

Mr. LEVITAN. It is not a ‘‘keep going with everybody doing what 

they have been doing,’’ or ‘‘fire the contractors and start all over 

again.’’ 

Mr. PORTMAN. Yes. There is plenty of blame to go around. 

Mr. LEVITAN. There are a myriad of options. 

Mr. PORTMAN. Part of the blame rests right here, I believe, in 

Congress, because we have not been perhaps as good at oversight 

as we should have been over the last few years in following this, 

being sure the requirements were appropriate, being sure there 

weren’t over-promises, being sure that the IRS had the management systems. There is certainly blame at the IRS and I think you, 

Mr. Palmquist and Mr. Dacey, have all outlined that. I think Mr. 

Pomeroy just referenced one, which is lack of expertise both on 

management and with regard to technical expertise. 

I still pose that question. I am not suggesting it is black or white, 

but I do think that is something that as a fiduciary, being a Member of Congress representing a lot of people who pay taxes, some 

of which have now been used for a program that has had huge cost 

overruns, I think it is an appropriate question to ask. Mr. 

Palmquist, could you answer my question? 

Mr. PALMQUIST. Congressman, we, as a federally funded research and development center, are also prohibited from making direct source selection decisions, but we do, in fact provide counsel. 

We did provide Commissioner Everson our thoughts in general on 

a replacement of a PRIME contractor on a contract of this nature 

and magnitude. The fact is, unfortunately in the state of affairs 

today, many programs, with many different PRIMEs, are experiencing similar problems. In other words, a new PRIME is not necessarily going to change a program radically. Also, a change in 

PRIME at this juncture would result in a tremendous loss of experience that has been gained, some good experience, some bad experience. 

So, while we did not and cannot directly advise that, we did tell 

Commissioner Everson that there are a good number of issues that 

would come up in the change of the PRIME. We felt it would be 

a setback in the program of several years. 

Mr. PORTMAN. I won’t attempt to paraphrase what you just 

said, but it sounds like what you are saying is you identified problems, again, that can be shared, but certainly with the contractor, 

and yet you believe from your experience with other agencies and 

departments that these problems are not unique to the IRS. You 

are not sure there is another PRIME out there that has done much 

better, and that you believe that given their experience, it would 

be a mistake at this point for them to pull this contractor. 

Mr. PALMQUIST. Again, sir, without directly making a comment 

that would directly affect the source selection decision that this 

would be, we see a lot of benefit in staying the course. We also do 

see benefit in a change. We see a lot of evidence indicating that the 

66 

team that is in place is a capable team, and if corrections are 

made, can, in fact, deliver for the IRS. 

Mr. PORTMAN. Mr. Dacey? 

Mr. DACEY. In terms of—— 

Mr. PORTMAN. You are not constrained by any of these procurement issues, I know. 

[Laughter.] 

Mr. DACEY. No, but I won’t be making a recommendation today 

either on that account. I think the issues raised are valid, and certainly SEI in their report raised a number of the issues that would 

have to be considered. Certainly Commissioner Everson this morning had indicated an approach to moving some of the other contracts away to potentially other contractors until it can be demonstrated that CSC can carry out the current contracts, and I think 

those are all valid considerations. 

I think the other issue, too, which hasn’t been highlighted yet is 

that a lot of the issues are going to need to be resolved by IRS 

itself and switching contractors isn’t going to fix that. So, there is 

a heavy amount of effort that I think IRS needs to accomplish, and 

they have set about doing that would have to be done regardless 

of the PRIME. 

So, I think there are just a lot of issues there. Again, I don’t have 

a bottom-line analysis. I won’t give one today. We haven’t studied 

it in any great detail, but there are substantial issues that would 

need to be addressed and considered before any consideration like 

that were made. 

I would highlight, too, that the Commissioner’s announcement of 

looking to other contractors is, from a personal standpoint, a little 

bit of competition, which is healthy in that regard. I would, however, warn that it would be important to make sure that those efforts, to the extent that they interact with the systems that are 

being developed by CSC, are well coordinated and also reiterate 

our concern which we have made for several years that IRS needs 

to have the internal capacities and management capabilities to 

manage the contracts, whether it be by PRIME or someone else. 

So, simply taking that to another contractor may not be the full 

solution. The IRS really needs to make sure they have got their 

house in order and don’t take on too many projects that exceed 

their capabilities. 

Mr. PORTMAN. My time is ending and I wish I had much more 

time, but let me just, if I could, ask another general question, Mr. 

Chairman, with your leave. Mr. Cofoni, would you like to comment 

on any of the other three comments? 

Mr. COFONI. No, thank you. 

Mr. PORTMAN. I don’t want to put you in that position if you 

are not comfortable. 

Mr. COFONI. We do feel that the right thing for the government 

and the IRS, and this will sound self-serving, but we honestly believe that the body of knowledge we have accumulated in the last 

4 years has enormous value to us going forward, so we would obviously—we would like to continue. 

Mr. PORTMAN. It seems to me that, Mr. Levitan, you are somewhat optimistic about IRS making some of the changes that Mr. 

Dacey just outlined and that, in fact, you think some of those 

67 

changes have been made even in the short term. Certainly the announcement today that the Commissioner is looking to other contractors for some of the other projects would be consistent with the 

general advice that the Oversight Board has given. You have also, 

though, given some very specific advice on limiting these projects, 

in fact, even postponing some, focusing on, it seems to me, some 

of the more important ones. Do you think the IRS is making 

progress, and then let me ask a general question of the whole 

panel. 

One of my concerns about this process of contracting on information technology is that it seems to me when you go through the request for proposal process, which is where these companies are 

competing for this business, that there is often an issue with requirements. As we have said, the IRS did not perhaps spell out the 

requirements and some of the data surprises may relate to that. 

Also in the nature of competition, there is over-promising. 

I would just like to get, once Mr. Levitan has a chance to answer 

that earlier question, just a general sense, because this is important going forward, how much of it is due to the requirements not 

being spelled out properly and true surprises, to the extent those 

can be identified as separate from what should have been in the 

requirements, and how much of it is just contractors want this 

business so they make promises they can’t keep. Once they get 

halfway or two-thirds of the way through the project, it is their 

project, understanding that on IFS, Mr. Cofoni, you are willing to 

pick up some of these costs yourself. That is just a general question 

that I have about this that I think is relevant going forward. Mr. 

Levitan? 

Mr. LEVITAN. As I mentioned, the project fell in a ditch this 

summer. I was very impressed with the way the Commissioner reacted to that and the way he stepped back and said we have got 

to do a thorough study, we have got to put in a plan of improvement. 

Going back to our nine specific recommendations, eight of which 

had nothing really to do with the PRIME, we have seen some significant progress on that. Business unit management of the program is well underway. Putting John Dalrymple in charge of that 

for the IRS is a very positive step. 

Creating an environment of trust and confidence and teamwork 

is another responsibility of the Deputy Commissioner. That is going 

to take time because it is a cultural issue, and even the very—and 

what I am talking about here is the various units of the IRS working together in an effective and trusting way. That, I think, is 

starting to happen. It needs a lot more work. 

They have made changes to the systems development life cycle 

to make it more effective and putting in place steps to make sure 

that they are following that, which they didn’t always do in the 

past. The contracting process continues to be an issue and needs 

a lot more work. 

The experience of the IRS management team is very important. 

They have started searches for people to bring in and strengthen 

that team. They are doing the right thing, but that effort is moving 

glacially slow and needs to be moved ahead much more quickly. 

68 

So, I think a lot of the right steps are underway. They are just 

underway and will require a lot more work to really put them in 

the position that they need to be in to manage the program and 

work with the PRIME in an effective manner. 

Mr. PORTMAN. I know you will continue your oversight to make 

sure that happens, Mr. Levitan. We appreciate what the Board 

does and your expertise. 

On that general question, are there any comments? My time is 

ending here, so you will have to be brief. Mr. Dacey, you have got 

some experience with this. 

Mr. DACEY. In terms of the issues in going forward, again, there 

are a number of challenges. I think that the recommendations that 

were contained in this number of studies were good things, and I 

think IRS’s intent to continue to use outside folks with expertise 

to help look at their processes in carrying those forward is another 

important element. These studies, which were commissioned in 

2003, were fairly extensive relative to the work that had been done 

before from an outside viewpoint, and I think continuing that is a 

very positive thing, to keep watching the process as it goes forward 

and keep seeing if it is progressing as IRS plans. 

Mr. PORTMAN. Mr. Palmquist? 

Mr. PALMQUIST. Yes, just to echo, the improvement effort itself 

needs to be treated as a project. It needs to be planned. It needs 

to be budgeted quite honestly and monitored. It can’t be assumed 

to happen just by good intent. It needs to be its own separate effort. 

Mr. PORTMAN. I thank my colleagues for their deference. 

Chairman HOUGHTON. Thank you. Mr. Weller? 

Mr. WELLER. Thank you, Mr. Chairman. I appreciate this opportunity. I direct my question to Mr. Palmquist, Mr. Levitan, and 

Mr. Dacey, if each of you would respond. In its report, the SEI 

identified two cases where the primary contractor, Mr. Cofoni’s 

company, attempted to develop software in-house instead of acquiring it from companies with expertise. These decisions later proved 

to be costly. I was wondering, what would you recommend to avoid 

a recurrence of this kind of decision making? 

Mr. PALMQUIST. Congressman Weller, I assume you are talking about TRW and also to the first attempt at a business rules engine. The business rules engine effort that failed in early 2001 

turned out to be—we did not investigate this extensively—but 

turned out to be a combination of business factors that simply 

weren’t understood at the time and, also I think, requirements. The 

effort to use TRW to do the legacy to the computer—excuse me, the 

interface to the legacy environment—we understand that the proposal that was delivered did not meet the schedule as envisioned 

and, therefore, was not accepted. In retrospect, that appears to 

have been a decision that cost the program. 

The CSC has worked to invigorate their development environment. The use of the business rules engine is part of that, but the 

development environment does need to—is improving, but does 

have some issues still remaining, again, with respect to the testing 

element, and contract and requirements management. 

Mr. WELLER. Mr. Dacey or Mr. Levitan, do you have a comment, please? 

69 

Mr. DACEY. Again, we haven’t done a significant analysis of 

those particular issues that were just discussed, but I would like 

to say that it is important to have appropriate amounts of information when these decisions are made, as the TRW example, I believe, was a situation where there was, I think, an overly optimistic 

expectation of when this software would be delivered and the decision was made, well, TRW can’t deliver in that timeframe. As it 

turns out, it has taken much longer to develop the product, and as 

was just mentioned, had that been known in the beginning, it could 

have been factored in most likely. 

So, I think the key gets back to fixing some of these fundamental 

issues of understanding the projects and coming up with reasonable cost estimates and processes that will yield those. I do think, 

as said before and we have said before, there have been overly optimistic expectations, too, in setting these up, as well as the issues 

having to do with some of the other problems that have delayed it, 

like system requirement understanding and things of that nature. 

Mr. WELLER. Thank you. Mr. Levitan? 

Mr. LEVITAN. Systems projects fail or have significant overruns 

for one or a combination of three reasons. Number one is we don’t 

have the appropriate methodology. In this particular case, we had 

a pretty good methodology, but it needed some improvements. 

Those improvements have now been made, positive factor. 

The second reason projects run into trouble is the project teams 

just don’t follow the methodology. They try to take shortcuts. That 

was done over and over again in this particular case. We now have 

a commitment that that will not happen again, that we will have 

the appropriate discipline and management. That is yet to be proven, needs to be monitored very carefully. 

The third factor is the skills, capability, and experience of the 

people who are actually doing the work. We think that that has 

been demonstrated, that that has been inadequate and has not 

been fulfilled and that is still to be proven going forward, and we 

are very concerned about that. 

Mr. WELLER. Thank you. Mr. Cofoni, I hope you respect my 

questioning. I am one of those who believes in giving the private 

sector the opportunity to participate and contribute because I believe there are efficiencies in the private sector, so I hope you realize my questioning was friendly regarding that particular issue. 

The other question I would like to direct to you, Mr. Cofoni, and 

you have already addressed part of it, you indicated the earlier 

issue of off-shoring of various types of government contracting jobs, 

that potential, and I know you answered earlier that you have no 

workers outside the United States performing any work for this 

IRS contract. Are you aware of any subcontractors or any other 

contractors to the IRS that have that work performed offshore? 

Mr. COFONI. No, sir. All of the work we are doing and our 

PRIME Alliance team members are doing under this contract is 

being performed within the United States. 

Mr. WELLER. Okay. Mr. Levitan and Mr. Dacey, from your perspective, there has been some concern that I have heard from constituents that I have that there is potential that tax preparers may 

be using workers outside of the United States to do tax preparation 

work and their concern is there is personal security, their privacy 

70 

regarding someone who may have access to their personal data 

when it comes to tax preparation. 

Number one, are you aware of any tax preparation firms that 

today are using workers outside of the United States to do tax 

preparation work, and then from your perspective, are there any 

personal security concerns that we should be aware of or sensitive 

to? 

Mr. LEVITAN. Mr. Weller, the Board has not looked into that 

issue so we really don’t know the answer to that. It obviously is 

a concern and could be a concern and deserves looking into, but we 

have no knowledge of this at the present time. 

Mr. WELLER. Okay. Mr. Dacey? 

Mr. DACEY. I would echo Mr. Levitan’s comments. We also have 

not done any work in that area to look at it. I am not familiar with 

those tax practices necessarily, but it is an issue that does need to 

be considered, I think, as well. 

Mr. WELLER. Thank you. Thank you, Mr. Chairman. 

Chairman HOUGHTON. One of the things that I guess baffles 

me is that here we are. We are the Subcommittee on Oversight, 

and we can’t get into the management here. We can ask questions. 

We can make suggestions. We can, I suppose, hold up money for 

the IRS, but that is a tough issue because it is such a vast operation, and in general, they are doing a great job. 

The Oversight Board that you are in charge of, isn’t that part of 

management? You can make some recommendations, but you don’t 

really get into the works. Carnegie Mellon and Mr. Dacey, you can 

do analysis. You can help, but you are not really in there. 

I would like to ask you, Mr. Cofoni, not trying to pin the tail on 

you or your excellent organization, at what time do you cancel the 

contract with a PRIME contractor? What prompts you to do that? 

Mr. COFONI. I would say certainly if we don’t take the recommendations that have come from these studies that are root 

cause analysis and corrective actions, if we don’t implement those 

actions and see improvement, then that would be a cause. If we 

don’t deliver the end products of CADE and IFS, it seems to me 

those would be indicators. We are committed to doing all those 

things. 

Chairman HOUGHTON. At what point would you go to the Commissioner and say, it is impossible for us to operate here. The conditions are such that we cannot do the work which you expect of 

us and therefore we want to resign our contract. 

Mr. COFONI. We have begun to take positions—in the past—I 

want to correct a possible perception that we might take, continue 

doing work for revenue purposes. In all cases where we continued 

doing work before having a good set of requirements, it was with 

the best interests of the IRS at heart, people trying to be accommodating, trying to meet commitments, schedules that were necessary 

for internal performance or commitments externally. 

So—but we have had a bit of an epiphany. We really understand 

we can no longer do that, and we have put a stake in the ground 

and we have stopped work on projects when we thought we didn’t 

have the right prerequisites to do a quality job. That is going to 

be the new pattern and that will be our behavior going forward. 

71 

So, at what point, it is going to be at the point where we don’t 

have clearly defined, detailed requirements, and it is okay. If we 

together don’t understand what they are, then we should continue 

to explore, and if at the end of exploring we are still not convinced 

we know what they are, then we need to provide adequate reserve 

to deal with the unknown unknowns. So, I would say if we don’t 

have detailed requirements, we are not going to go forward on any 

new work. 

Chairman HOUGHTON. When you deal with a consultant or 

with anyone from outside your shop and you buildup a body of 

knowledge, it is very difficult to cut the string because it is expensive, there is lack of education and personal contacts and things 

like that. Yet at the same time, it is important to look very firmly 

at whether people are doing the right job. 

Equally important as what a contractor has done, and we have 

touched on this all along, is what happens inside the shop. Mr. 

Levitan, you said that there is glacial progress as far as management getting a hold of this thing and squeezing it. Break it down 

a little bit, will you? 

Mr. LEVITAN. The specific area that I mentioned was improving 

the capability of the IRS to manage this program, and they just do 

not have people—the numbers of people or people with the depth 

of experience of managing programs of this scale to be able to do 

that. They are not capable of doing that at the present time. They 

have recognized it. They have initiated some searches. They have 

search firms working for them, trying to identify and then hire people that can bring that added competence. It has been moving very 

slowly and we have been urging them to make that move as quickly as possible. 

Chairman HOUGHTON. Let me just cut in here a minute. I see 

an almost impossible situation out there. If you are right and there 

is a lack of management ability to direct and enforce and monitor 

what is going on in terms of the PRIME contractor, and yet on the 

other hand in terms of the IRS internally there is a lack of confidence in what the PRIME contractor is doing, how do we get out 

of this mess? 

Mr. LEVITAN. That is the crux of the issue. Again, we get out 

of the mess by improving the capabilities of the IRS through process improvement and people and experience improvement, by working with the PRIME team, trying to make sure that we get the 

right people doing the right work that have the right skills, and 

that needs a lot more attention. It is going to take time, it is going 

to take a lot of work, and there will continue to be significant risks 

in that. 

Chairman HOUGHTON. We all know it ought to be done. The 

question is, will it be done and who does it and what part does this 

group play in this thing? We can ask questions. We can sit here, 

and we can be interested in your particular expertise. Is there a 

confidence that the next step will be taken so we are really going 

to get our hands around this thing so that next year when we have 

a session like this, a hearing, we are not going to be talking about 

the same issues? This has been going on a long, long time. 

Would any of the rest of you have any comments on that, Mr. 

Palmquist, Mr. Dacey? 

72 

Mr. PALMQUIST. Mr. Chairman, one of the recommendations— 

the fundamental recommendations we made in our report—was 

that at this point, there is no coherent systems engineering process 

on CADE which takes care of looking at CADE long term. The 

CADE has been allowed to focus on the short term because of the 

problems. To echo Mr. Levitan, the IRS itself does not have a dedicated systems engineer. They don’t have a dedicated software architect or software engineer. They don’t at this point have the technical staff to work with the program. 

The recommendation that we would have is to treat this improvement itself as a project along with the delivering of the 

deliverables. It needs to be measured, it needs to be agreed to by 

all stakeholders, so as you said, we don’t arrive here a year from 

now. There have to be points along the way where you are looking 

and say, where are we? If this is not working, to have the defined 

actions in place that I will take step A or step B at this point, 

which, as you said, could include a change, could include a continuation. 

Chairman HOUGHTON. What chance would you have, before we 

move back to Mr. Dacey, what are the odds you would give to this 

thing working and getting back on track, 1 out of 10? 

Mr. PALMQUIST. As we told Commissioner Everson, we gave a 

60 percent chance that Release 1 would be delivered by the end of 

this year. That was Release 1 as defined to us back in the fall. I 

don’t know if that functionality or design has changed. I understand that there are elements that have. I would probably -as an 

engineer, I am going to have to pick a deliverable—and so I will 

go with that. We predicted a 60 percent chance of delivering CADE 

Release 1, which is fundamentally the infrastructure. 

The CADE Release 1 is actually viewed, in our opinion, incorrectly. It is far more complex than simply the small group of 

1040EZs. When Release 1 is there, the infrastructure is there for 

the rest of the releases, but we went with 60 percent, Mr. Chairman. 

Chairman HOUGHTON. How about you, Mr. Dacey? 

Mr. DACEY. In terms of the issues that we started to talk about, 

Mr. Levitan and Mr. Palmquist, there certainly is the human capital element of this which needs to go on. I think an important 

point that Mr. Palmquist made was you need to manage the process of fixing these issues almost as a separate project, and I think 

that is important. Again, one of the concerns we have had all along 

has been that the projects continue to roll on in the hope that some 

of these other things will get resolved, but there wasn’t a separate 

process there to make sure they all got fixed. 

I would also like to say that in looking at this modernization 

process at IRS for quite a number of years now, it was only in the 

recent couple of years that some of the very foundational elements 

of system development were in place in enterprise architecture, a 

life cycle which specified how these processes were to take place 

and implementation of some of these improvements in the management practices. That is, again, a relatively short period of time. 

So, I think that those have been very positive steps in getting 

some of these foundational elements in place, but again, as we are 

finding in some of the testing, there are still risks that some of the 

73 

things that weren’t dealt with very early on in the program project 

development are creeping back in and causing problems today. 

I would like also to say that our relationship with the IRS has 

been positive. They have been open and candid and sharing very 

openly in our experience with these processes, which is a very positive step in my mind. They haven’t tried to, in our mind, hide anything or do anything that would obfuscate our efforts. So, I think 

that is a very positive step in their acceptance of that. I don’t know 

what the experience is of the other folks, but I assume it is similar. 

Chairman HOUGHTON. Okay. Mr. Pomeroy, do you have any 

further questions? 

Mr. POMEROY. I want to thank the panel. It has been a very 

interesting hearing, Mr. Chairman. I particularly have enjoyed Mr. 

Levitan’s laying it right out there very straight. Having heard a lot 

of witnesses, I found your take on all of this to be very helpful. 

I also thought Mr. Palmquist’s comments on managing the improvements as a separate project has an ongoing role for this Committee, Mr. Chairman. I would think we would probably want to 

reconvene this forum in a number of months, to be discussed in 

terms of what would be an appropriate time frame, but if we manage it as a separate project, I think there is an ongoing oversight 

role in seeing how we are coming. Thank you. 

Chairman HOUGHTON. Thank you. Gentlemen, thank you very 

much for your time and your wisdom and your advice. Thank you. 

Meeting adjourned. 

[Whereupon, at 11:20 a.m., the hearing was adjourned.] 

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